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24 Jan, 2023

Where to From Here? The Financial Impact of Environmental Changes on Family Farms

By 2030, Ireland must reduce agricultural emissions by between five and seven million tonnes of carbon dioxide equivalent, writes Noreen Lacey, our Head of Banking.

The new Nitrates Action Plan, which will be introduced in January 2023, will change the organic nitrate levels deemed to be produced per cow, with a new banding limit brought into effect for all herds. This imminent change, coupled with the forthcoming review of Ireland’s current nitrate derogation regulations, is set to act as a noteworthy constraint to expansion and increased production for a significant cohort of Irish dairy farmers.

Changes to the Status Quo

The current nitrates regulations govern the maximum number of animals a farmer is allowed to carry on their holding. Any breach of these regulations will result in penalties to the farm's direct payments. 

Under the old Nitrate rules, a farmer was allowed to carry 76 cows on 40 hectares, and they could still farm within the 170kg/hectare limit with no requirement to apply for nitrates derogation. If a farmer applied for a derogation from the rules, subject to meeting additional conditions designed to protect the environment, then they were allowed to increase their stocking rate above the 170kg livestock manure nitrogen/ha up to 250kg nitrogen/ha, across the entire land declared on BPS. For our farmer with the 40 hectares, that meant cow numbers could be increased to 108 cows and they would still be compliant. 

a)    Nitrates Banding:

The new Nitrates Action Plan commencing from January 2023 will increase the deemed organic nitrates produced per cow based on milk yield and will move about 17% of herds from 89kg of organic nitrogen excretion per cow to the next band at 106kg per cow, forcing some dairy farmers to involuntary reduce their stocking rate. 

Table 1: New Nitrates Banding Figures

PeriodDescriptionOrganic N Per Cow

2022

Current Organic N Figure 

89

2023

Low Yielding:   <4,500 kg

80

2023

Average Yielding:   4,500 - 6,500 kgs 

92

2023

High Yielding:   >6,500 kgs

106

b)    Review of Maximum Stocking Rate:

A mid-term review of the Nitrates Action Plan could also see the possibility of reducing the maximum of 250kg of organic N/ha to 220kg depending on water quality during the transition.

Table 2: Impact that reduced stocking rate from 250kg N/ha to 220kg N/ha will have on herd numbers

Status QuoLow BandMiddle BandHigh Band

250kg N/ha and 89 kg N/Cow

220kg N/ha and 80kg N/Cow

220kg N/ha and 92kg N/Cow

220kg N/Ha and 106kg N/Cow

Stocking Rate

2.8

2.75

2.38

2.08

Farm Size Ha

40

40

40

40

Cow Numbers

112

110

95

83

Financial Implications - Case Study

To facilitate a better understanding of the impact that some of these changes may have on family farms, let’s examine the following scenario.

Farm Profile

Cow Numbers

112

Whole Farm Size

40 hectares

Current Kg Organic N/Ha

248 kg (89 kgs)

Yield Per Cow

6,800 Litres

Assumptions:

Milk Price

·       50 cpl (actual constituents + VAT included)

Feed

·       1.35t/cow @ €440/t

Fertiliser

·       Assuming 220kg/N/ha = 35t @ €900/t (Base case)

Cattle Sales

·       Assuming 20% replacement Rate & 5% mortality

·       €900 /Cull Cow

·       €50/Calf

Other Variable Costs

·       6 cpl (based on average figs for 2022 – Excl. Feed and Fertiliser costs)

Fixed Costs

·       17cpl based on average costs for 2022 – no change across scenarios

This farm falls under the Band 3 Nitrates Banding as the average yield per cow is above 6,500kgs (6,300 litres). Consequently, the amount of organic nitrogen permitted from 2023 onwards will be 106kg/cow. Total income in scenario (B) would result in a 33% drop in income, allowing for a pro-rata reduction in feed and fertiliser costs based on 94 cows. In Scenario (c), if derogation were to be reduced to 220 kg organic N/Ha, the overall income would drop by 53%, based on the farm now carrying 83 cows. Feed and fertiliser have again been reduced on a pro-rata basis. 

Base Case: Current Farm Profile

Impact of Future Higher Banding

Proposal to Reduce SR to 220kg N/ha

Cow Numbers:

112

94

83

Whole Farm Size:

40

40

40

Kg Organic N / Ha:

248 Kg (89kgs)

247 Kg (106kgs)

220 Kg (106kgs)

Stocking Rate LU/ha:

2.80

2.35

2.08

Yield per Cow Litres:

6,800

6,800

6,800

Annual Supply:

761,600

639,200

564,400

Income

Cattle Sales:

€23,352

€19,599

€17,306

Milk Sales @ 50cpl:

€380,800

€319,600

€282,200

Total Income:

€404,152

€339,199

€299,506

Costs

Feed Costs 1.35t/Cow @ €440t:

€66,528

€55,836

€49,302

Fertiliser:

€29,333

€26,658

€23,994

Other Variable Costs:

€45,696

€38,352

€33,864

Fixed Costs:

€129,472

€129,472

€129,472

Total Costs:

€271,029

€250,318

€236,632

Profit:

€133,123

€88,881

€62,874

% Drop in Income from Base Case:

0%

33%

53%

Options to Maintain Cow Numbers

1.     Additional Lands:

The ability to analyse all options for farmers who wish to maintain cow numbers cannot be presented within the scope of this paper. However, we have identified and analysed two options based on the same base case scenario as per the previous case study. Let’s consider the option of a farmer who wishes to lease additional lands. The assumption here is that the farmer does not need the additional grass for forage, and the leasing of the lands is strictly required to conform with the new Nitrates Directive Plan. If this were the case, then assuming additional land rental for 8 hectares at a cost of €750/ha, then the impact of taking these additional leased lands would be a 5% drop in income from the base case. 

2.     Reducing Milk Supply

Again, if a farmer wished to maximise cow numbers, then another option would be to examine the possibility of reducing milk supply. This can be done by reducing the level of concentrates fed to cows in August and September so as not to compromise the cow nutritionally in the first three months of lactation. Proper nutrition is key during this period to ensure strong conception rates and maintaining overall BCS of the cow. 

By reducing feed by 150kg/head in August and September, this should reduce cow yields by c.300l/cow and then dry off cows a week or two earlier. This latter option may need to be fluid depending on milk yield performance. This option will reduce overall farm income by 23% from the base case due to the drop in milk yield and a slight drop in cow numbers.

1. Lease Extra Land 2. Reduce Milk Supply to Fit in Band 2

Cow Numbers:

112

108

Whole Farm Size:

48 ha (Lease 8 ha)

40

Kg Organic N / Ha:

247 Kg (106kgs)

248 Kg (92kgs)

Stocking Rate LU/ha:

2.33

2.7

Yield per Cow Litres:

6,800

6,250

Annual Supply:

761,600

675,000

Income

Cattle Sales:

€23,352

€23,352

Milk Sales @ 50cpl:

€380,800

€337,500

Total Income:

€404,152

€360,852

Costs

Feed Costs 1.35t/Cow @ €440t:

€66,528

Feed Costs 1.2t/Cow @ €440/t:

€59,136

Fertiliser:

€29,333

€29,333

Other Variable Costs:

€45,696

€40,500

Additional Land Lease:

€6000

€0

Fixed Costs:

€129,472

€129,472

Total Costs:

€277,029

€258,441

Profit:

€127,123

€102,411

% Drop in Income from Base Case:

5%

23%

Conclusion

The above case study demonstrates the financial impact that the new Nitrates Directive Plan will have on the higher-yielding herds. While it is the higher-yielding herds that are facing the immediate effects of this plan, any further changes to the overall nitrogen limits currently permissible will have far-reaching income effects for many more farmers. Everyone’s circumstances are unique to their own farm, and there is an onus for each farmer to review their own individual circumstances and put an appropriate plan in place that achieves the financial and environmental objectives of the business. It is likely that this new nitrates directive will act as a new quota for dairy farmers going forward, with a forced reduction in cow numbers inevitable on many farms.