18 Jan, 2024

Overcoming financial challenges: Adapting to reduced nitrogen limits on Irish dairy farms

The recent implementation of the Nitrates Action Plan and revised nitrate derogation regulations in Ireland has presented a significant challenge for many dairy farmers.

These changes are designed to address environmental concerns but have financial implications that require careful consideration and strategic planning for many dairy farmers in Ireland.

Shift from the Norm

a) Nitrates Banding:

Under the new Nitrates Action Plan, a shift in the deemed organic nitrates produced per cow, based on milk yield, has been implemented. This change will force some dairy farmers to involuntarily reduce their stocking rate, which in some cases, may impact production levels.

Band NumberCategory DescriptionMilk YieldsOrganic N Per Cow
1Low Yielding<4,500 kg80
2Average Yielding4,500 - 6,500 kg92
3High Yielding>6.500 kg106

b) Review of Maximum Stocking Rate:

A two-year review of water quality in 2023, as mandated by the European Commission Implementing Decision, will lead to a reduction in the derogation limit to 220 kg N/ha from 1st January 2024 for areas that have failed the review. This means a farmer with all their land now identified as being in 220kg N/ha zone will have to achieve a stocking rate no greater than 220 kg N/ha for the year 2024 overall. The new 220 limit does not have to be achieved on the 1st of January 2024, however the longer that change is delayed the more significant the actions may have to be to become compliant.

Financial Implications - Case Study:

To illustrate the potential impact on family farms, let’s examine a 50ha farm with 114 cows yielding 5,500 litres of milk. Falling under Band 2 Nitrates Banding, the permitted organic nitrogen has increased from 89kg to 92 kg N/cow. However, due to the Nitrates Derogation review, the overall farm limit will reduce from 247kg N/ha to 220kg N/ha.

Base Case: Current Farm Profile1. Reduce SR to 220kg N/ha2. Lease Extra Land3. Contract Rearing
Cow Numbers114100114119
Whole Farm Size 505056 ha (Lease 6 ha)50
Kg Organic N/Ha247 Kg (92kgs)218 Kg (92kgs)220 Kg (92kgs)219 Kg (92kgs)
Stocking Rate LU/ha2.782.462.492.38
Annual Supply627,000550,000627,000654,500
Cattle Sales€23,769€20,850€23,769€24,812
Milk Sales @ 40cpl€250,800€220,000€250,800€261,800
Total Income€274,569€240,850€274,569€286,612
Feed Costs 1t/Cow @ €380t€43,320€38,000€43,320€45,220
Fertiliser @ €450t€18,333€15,833€20,533€18,338
Other Variable Costs€43,890€38,500€43,890€38,615
Additional Land Lease @ €740 /ha€4,440€0
Fixed Costs€112,860€112,860€112,860€112,860
Total Costs€218,403€205,193€225,043€238,658
% Change in income from Base Case0%37%12%15%

Financial Analysis by ifac:

1. Reduced Stocking Rate: If cow numbers are reduced, farm profits could decrease by 37%, assuming a linear cut of 14 cows. However, the reality will be that farmers will cull lowest performing cows which will reduce the financial impact of less cows on the farm.

2. Lease Additional Lands: Leasing additional land at €300/ acre (€741/ha) would result in a 12% reduction in farm profits. Additional costs for cropping should be considered if the land is not used for replacement stock.

3. Contract Rearing Heifers: Contract rearing replacements could reduce variable costs by 16%, resulting in a 15% reduction in farm profits. The above scenario is based on contract rearing 25 replacements for 540 days @ €1.75 a day.

While the immediate effects are felt by higher yielding herds, the broader changes to nitrogen limits will have far-reaching income effects for many farmers. Financial institutions considering the long-term impact of environmental changes, may stress the current nitrate limits to 170 kg/N when assessing repayment capacity for new borrowings.

It is crucial for each farmer to assess their unique circumstances and develop a plan that aligns with both financial and environmental objectives. Balancing the books in this evolving landscape requires strategic decision-making and adaptability to secure the sustainability of Irish dairy farming.

This article was first published in our 2024 Irish Farm Report.