Implications of revised nitrates measures on the land market

The SCSI/Teagasc Annual Agricultural Land Market Review & Outlook 2023, published today, April 25th, examined the impact changes to environmental policies – specifically the Nitrates Action Programme – will have on the land market.

The Nitrates Action Programme – the means by which the European Union’s Nitrates Directive is delivered in Ireland – has undergone a number of changes, with stronger measures introduced for the protection of water quality. Amendments to these regulations principally relate to animal waste generated and chemical fertiliser allowance.

Changes

The methodology used to calculate the amount of nitrates at farm level has been revised and the new methodology is being implemented in 2023 in order to produce a more accurate nitrates figure for individual farms. The application of the new methodology will result in an increase in the amount of nitrates associated with some farms, relative to the approach previously used, and this will have implication for some farms - particularly grassland farms with a high livestock intensity.

The measure has a particular importance for dairy farms given that livestock intensity per hectare tends to be higher on these farms relative to drystock farms. For the purposes of the Nitrates Directive regulations, the livestock intensity is measured according to the livestock excretion rates for organic nitrogen (organic N) and organic phosphorous (organic P). Ordinarily, farms can operate up to a limit of 170kg of organic N per hectare under the regulations. However, farms can apply for a derogation from the regulation that allows them to operate with a livestock intensity up to a limit of 250kg organic N per hectare, i.e., 47% higher.

Farms with a derogation status form a minority of farms in Ireland, with approximately 6,400 farm holdings operating under this status and most of these being dairy farms. The estimation of organic N is based on a series of coefficients for each livestock type. Up to 2023, a common coefficient was applied for each dairy cow in the country, i.e., 89kg of N per cow. With the introduction of so called ‘banding’ in 2023, there are now three new specific N coefficients that can be applied to cows depending on the level of their milk yield.

Table 1 shows the criteria, which are used to categorise dairy farms into banding categories according to the milk yield per cow.

Table 1: Livestock coefficients according to milk yield band capacity

The implications of these banding regulations are particularly important for the subset of dairy farms in the highest band, i.e., where the average milk yield per cow exceeds 6,500kg. On these farms, the coefficient for organic N increases from 89kg per cow to 106kg per cow (an increase of 19%). Many of these farms have derogation status. Recent Teagasc analysis indicates that about one-fifth of specialist dairy farms in 2021 have milk yields above 6,500kg per cow. In order to maintain current levels of milk production, many of these farms will need to either increase their land area or reduce milk production in the short term.

Implications for the land market

Under standard economic theory, the demand for land (suitable for dairy farming) will increase in terms of both the volume of land demanded and the willingness to pay for each hectare of land. Prior to the policy change, many dairy farmers already had a latent demand to access more land. The available statistics point to the growth in the land area farmed by dairy farmers in recent years.

The introduction of banding further raises the demand for additional land on many dairy farms. Farmers in the highest band are expected to increase their willingness to pay for land due to the estimated costs (or foregone profit) associated with reducing production. This is purely a demand for additional land to adhere with regulatory requirements, whereas previous demands for additional land were often motivated by a desire to expand herd size to increase milk production.

Medium and long-term land leases are increasingly important in dairy regions. In a thin land market, dairy farmers will have limited opportunities to avail of such leases and the new regulatory measures are likely to heighten the willingness to pay for land in order to secure access to the additional leased land for the medium and longer term.

Quite how much of an impact this might have on the land market is likely to vary by region and even locality. It might be expected that the impact on the land market might be more acute in regions where dairy is the dominant farm enterprise and where stocking rates are higher. These dynamics can be summarised in a conceptual model of supply and demand in the land rental market. Note that the land values mentioned in the subsequent examples are purely for expositional purposes and should not be interpreted as a forecast outcome.

Case A

In the first example, Case A, Figure 1 shows the potential impact in a locality where half of all farm holdings are dairy farms and where there is a willingness among some drystock farmers to consider letting-out additional land.

Figure 1: Potential effect of banding on hypothetical local land rental market – Case A

It is assumed that one-fifth of dairy farms are operating in the highest banding category. In Case A, the initial equilibrium price is below €800/ha (i.e., where supply and demand intersect) and increases moderately to €800/ha as a result of the additional demand from dairy farmers. This outcome can emerge where there are a significant number of local landowners willing to supply additional land. In this example, there is some increase in the amount of rented land due to the regulatory policy change and the associated additional demand for land from dairy farmers. Rental activity increases in this locality by about 130ha. It is assumed that the highest bids for rented land emerge from the dairy farms in the highest banding category (both before and after the introduction of banding).

Case B

Case B is depicted in Figure 2, which shows an example where very few landowners are willing to lease out their land. In this example, the locality has the same strong dairy presence, with half of all holdings in dairy farming and half of these dairy farms in the highest banding category. The decision making of landowners is quite different, with a much greater reluctance to let-out additional land. In this locality, the impact of the banding policy is to raise the rental price from just above €800/ha to almost €1,000/ha, with little improvement in the amount of land rented.

Figure 2: Potential effect of banding on hypothetical local land rental market – Case B

Summary

This analysis shows that the impact of the banding policy on the agricultural land rental market could be highly dependent on the farming structures in a locality and the willingness of landowners to let out additional land. Approximately one-fifth of all dairy farms operate in the highest banding category, where milk yields exceed 6,500kg/cow. Economic theory suggests that localities with a high density of these farms will experience a larger increase in rental prices than other regions. This is particularly the case in localities where few landowners are willing to rent out additional land.

In both of the examples presented above, it is assumed that the largest bids for rented land emerge from dairy farms operating in the highest banding category. Some farmers will be outbid in the local land market, including tillage and drystock farms. In those situations, the challenge for tillage and drystock farmers may be to hold on to their existing access to rented land. Many medium and long-term land lease contracts are fixed in price until the contract comes to an end. However, the banding policy could eventually impact the price of these previously arranged land leases. The analysis shows that the policy impact could be much more benign in localities where a significant number of landowners are interested in letting out land.

The banding policy is also likely to have an impact on the land sales markets. Parcel sizes are an important consideration in both the land sales and land rental markets. Relatively small additional parcels can help dairy farmers to limit the impact of the policy change on production levels. However, the challenge is particularly acute for those dairy farmers operating in the highest banding category. In addition, young and new entrant farmers may face even higher land prices in places where there is a high concentration of these dairy farms.

This article first appeared in the SCSI/Teagasc Annual Agricultural Land Market Review & Outlook 2023, access the full report here.

Also read: Price of agricultural land to rise in 2023