Natural capital has emerged in the past five years as an important part of the drive to lower the CO2 emissions that exacerbate global warming, halt or limit species decline and generally protect the environment.

Effective stewardship of natural capital – the stock of natural resources such as geology, soil, air, water and living organisms – benefits entire populations. It reduces pollution and waste and brings cleaner water, adequate food and other materials, while addressing the threats of climate change and biodiversity collapse.

Action to protect and enhance these most precious assets falls not only to land owners and managers including farmers, corporates and governments, but to every one of us. Several incentives have been developed to encourage good practice, some of these replacing farm payments following our departure from the EU. Different policies and incentives are developing across the UK, particularly between Scotland and England.

There’s much to do. Nature is still seriously declining across the UK – already one of the most nature-depleted in the world. You can read about our progress or otherwise in the latest State of Nature report.

Here at Galbraith, we’re using our depth and breadth of expertise in both Scotland and England to provide advice and management both for traditional clients and new investors coming to realise what land has to offer for the economy, environment and society.

Much of the work we’re doing is reflected in regular updates on our website and via our social media channels. Below we offer a summary of those insights and include a look ahead at what to expect in 2024.

Weather

Harvest 2023 will have gone in the ‘I would rather forget about it’ pile for most farmers across the UK, not least because 2022 will still have been fresh in their memories as the dream harvest – perfect weather and a huge financial success.

Gross margins from harvest 2023 were squeezed at both ends. The national results haven’t yet been collated but, cereal crop yields look like they will be down 20-25% on the five-year average and gross margins could see a drop of at least 50%.

The poor weather this spring prevented crops putting on yield and the summer was unpredictable for harvesting crops in a timely fashion with the quality of all crops but particularly malting and milling crops suffering the most.

Input costs rose significantly, mainly due to the war in Ukraine nearly tripling fertiliser prices, and doubling fuel costs and crop prices continued to fall from the highs of nearly £360/t for wheat in 2022 to around £185/t today.

A 35% reduction in this year’s annual BPS payment has further stretched farmers’ cashflow and that is before taking into account a hike in interest rates and banks becoming ever more nervous about sizeable overdrafts and loans.

The rain this autumn has also been relentless, and some winter crops sown in fields which are now saturated will be lucky to make it through winter.

Scottish subsidy update

This year has brought about some more direction on the future of the Scottish agricultural subsidy system. The Scottish Government launched a consultation on future agricultural support on 29 August, setting out plans for a restructured, four-tier support system of direct and indirect payments which will alter the existing Basic Payment Scheme (BPS), which is currently due to run in its present form to 2024.

From 2025, the Scottish Rural Development Programme (SRDP) route map sets out that the BPS scheme will continue in 2025 but ‘with some changes’, such as the introduction of new environmentally based conditions, with farmers being required to deliver climate and biodiversity outcomes to secure subsidy payments. Scottish ministers say this approach is to assist farmer and crofters to lower farm emissions, introduce different ways of farming with lower carbon emissions and increase efficiency.

We are encouraging farmers to engage with the forthcoming changes to the system and take advantage of the grants available via the Preparing for Sustainable Farming funding pathways, funding is currently available for carbon audits, soil sampling and analysis and animal health and welfare interventions.

Looking ahead, the Cabinet Secretary, Mairi Gougeon, has stated that by the NFUS Conference (8-9 Feb 2024), details of Tiers 1 and 2 payments will be set out. As we move through the year, further guidance should be made available by the SRDP so farmers can plan ahead and make the most of the forthcoming subsidy system.

Galbraith’s team of agricultural consultants working across the country will be able to provide bespoke advice for your farm as these changes roll in.

Sustainable Farming Incentive

The long-awaited summer launch of the 2023 Sustainable Farming Incentive (SFI) in England eventually turned into a controlled rollout through the backend of 2023. Whilst this was initially frustrating to those wondering whether to leave areas of their farms out of this coming year’s cropping plans, it was probably a blessing in disguise.

The Rural Payments Agency (RPA) may have left it until the last minute but at least we didn’t all try to submit application forms on the same day and overload the notoriously fickle RPA IT system. Registering an expression of interest was easy to do and Defra seems to be working its way through the pile, effectively placing farmers in an orderly queue ready to apply.

Once an application was submitted, the RPA processed the form quickly and an offer would be sent out in a few weeks. Once accepted, these instantly become live and farmers received the first of their quarterly payments soon after.

For those still sceptical about applying or deliberating what to do this spring, it is maybe worth reflecting on the current position of farming in England:

  • An average harvest with poor quality crops cut at high moisture levels and grown on the back of high input prices;
  • Falling grain markets and unsustainable livestock markets;
  • A 35% reduction in BPS payments on average from three years ago;
  • Increases in fixed and variable costs;
  • High interest rates and increased overdraft costs.

The SFI offers some financial risk management in the form of three years of guaranteed payments. Whilst those with current Countryside Stewardship Scheme entitlement may have to be more creative in how they layer on the ground options, none of the desktop exercises are particularly onerous. The SFI should offer something to all farm types and bolster income in uncertain times.

Managing cashflow and reviewing your business will be key to staying profitable in 2024. More than ever, we would encourage farmers to seek our advice and expertise.

Regenerative farming

The fashionable phrase ‘regen farming’ seems to be here to stay across the UK. It is all but impossible to read an article about farming, the countryside, or the rural sector without seeing those two words appear somewhere in the text. Machinery manufacturers also seem to have developed a propensity to label any old bit of kit ‘regen’ and palm it off as something new!

But what does it really mean? From a practical point of view, out on a working farm it encompasses lots of things farmers are already doing – direct drilling, growing cover crops and experimenting with how they graze stock on different leys and forages.

But, as margins tighten, a regen approach could increase farm profitability by helping to reduce variable and fixed costs.

A low-input, direct-drilled cereal crop may not yield as much as its traditionally grown neighbouring land over the hedge, but the cost savings may be enough to make it at least as profitable if not more. Similarly, out wintering livestock on a bale grazing and brassica-based system will reduce labour, bedding and veterinary costs.

It can also allow easy entry into a plethora of lucrative agri-environment schemes which reward farmers and landowners for their holistic approach to producing food and looking after the land.

Ultimately, going forward, farmers in the UK will have to go about running their businesses with one eye on profitability and the other on the environment, so why not embrace regen farming – you’re probably doing more than you think already!

Transforming rural economy

In July, we announced that our experts had contributed to a pioneering research project exploring how to ensure Scotland benefits fully from a green recovery while presenting a blueprint for boosting the UK’s rural economy.

Working with selected partner organisations, Galbraith explored the potential of carbon sequestration – removing greenhouse gas from the atmosphere to slow climate change – in community wealth-building.

Funded by the UK Government through the Community Renewal Fund, the project was set up by Highlands and Islands Enterprise (‘HIE’) to assess natural assets as well as current sequestration activity in Argyll and Bute.

HIE said its study, Natural Capital and Scotland’s Rural Communities, highlights a ‘billion-pound opportunity’ for Argyll and Bute to benefit from a ‘green recovery’. Galbraith’s contribution, Requirements for Highlands and Islands Carbon Market Turn-key Funding Platform, offers recommendations to turn the region’s carbon potential into economic practice.

These include the establishment of a special body to undertake research and development, provide a sophisticated carbon trading platform, and attract investment at landscape scale. The report includes data provided by an assessment tool developed by Galbraith to deliver bespoke Natural Capital Atlases for clients who own or manage land.

Biodiversity net gain

Biodiversity net gain (BNG) is the pioneering initiative to improve biodiversity by requiring developers to deliver at least a 10% increase in ‘biodiversity value’ for every development project in England. Under the Environment Act 2021, it was due to come into force in November 2023, but has now been delayed until February 2024.

Although the market in BNG offsets has already been developing in advance of the statutory requirement, many local planning authorities remain under-resourced and unprepared to meet the challenge. Helpfully the most recent regulation updates make the BNG commitment a condition of a planning consent, rather than a prerequisite; this should help ease the local planning authority bottleneck.

The BNG framework creates a novel commercial structure whereby a landowner can receive significant one-off, upfront payments in return for committing areas of land to long-term management constraints; for a minimum of at least 20 years, but potentially much longer. Landowners need to consider such commitments carefully and many are choosing to consult their successors who will have to live with the legal constraints placed on future land management. Likewise, consideration needs to be given to taxation issues and management costs over the long term, which may need to be funded from the immediate lump-sum payment.

An updated ‘Metric 4.0’, published in July, is the latest version of the key tool to provide the standardised approach to assessing the biodiversity value of each habitat. Many ongoing projects have had to reassess their baseline, but hopefully this will now stay in place as the underlying measure, without further radical change. The Metric is not perfect, but it provides the statutory baseline which is pivotal to crystallising value in BNG units.

Next year should see the market for BNG offset units accelerate, but landowners need to take specialist advice in this novel area.

Current demand for land suitable for natural capital outcomes

As a firm we continue to see demand from the market for land suitable for natural capital outcomes, addressing projects such as woodland creation, peatland restoration and biodiversity/conservation.

The gold rush we did see for some two to three years, until midway through 2022, has definitely settled. There is a more considered outlook and demeanour by buyers, with due diligence being undertaken in advance of progressing their interest, such as with soil surveys, planting potential assessments, bird surveys, degraded peatland assessments.

Buyers want to really bottom out the suitability of the land for their own outcomes before they offer. It is also worth noting that this type of buyer is predominately looking for scale when considering land available to purchase.

This year has seen less availability for suitable land this year but demand continues. As has been the case since the introduction of the natural capital buyer, the traditional landed and farming buyer also remains in the market so the potential outcome usage of land remains varied.

Soil carbon

Many farmers remain confused about ‘Net Zero’ and ‘carbon neutrality’. Measurement and management can appear complicated and essentially conceptual. However, increasing interest in regenerative farming provides a practical focus on soil health, something most farmers should already be very familiar with, but which may have been pushed down the agenda in the chase for ever-higher yields.

Improving soil quality gives it better structure, storing water and nutrients and feeding vital soil organisms. It enhances food production by increasing soil fertility and resilience. Both of these are practical, tangible results which should improve profitability. In addition but less visibly, better soil management helps mitigate climate change by absorbing carbon dioxide from the atmosphere and reducing greenhouse gas emissions.

More intensive farming has resulted in losing sight of soil management, with ever greater horsepower and chemical application combining to degrade the quality of our soils. Slight tweaks to management may result in lower outputs, but will generally provide tangible economic rewards with greater profitability and a better carbon footprint.

The inclusion of an incentive to carry out a Soil Management Plan in the English SFI 2023 is a small step towards highlighting these fundamental issues to every farmer.

Natural capital private funding

It is becoming increasingly evident that the Scottish Government is prioritising the support of nature and communities through private funding. This is a significant shift in policy from the current system, wherein the primary financial support for land owners and managers is from prescriptive publicly funded schemes such as the Agri-Environment Climate Scheme (AECS).

Public subsidies removed initiative and control from the landowner but helped to introduce a shift from post-war food production intensification policies which were detrimental to biodiversity.

Since the UK’s departure from the European Union, the devolved Scottish Government has had the opportunity to reform current agricultural funding through a variety of different mechanisms. One mechanism is the Facility for Investment Ready Nature in Scotland (FIRNS). FIRNS is a non-prescriptive funding option that gives land managers the freedom to design collaborative projects which have environmental and community benefit.

Crucially, the project has to be designed so that funding will come from the private sector in the long term. For businesses, having access to land means that they can demonstrate legitimate positive change which would not have been able to occur without funding assistance.

Galbraith has been involved in several FIRNS projects across Scotland from the Solway Firth in the South, to Kinlochbervie in the North. We are well placed to provide reasoned consultancy to help gear projects up to the requirements of private investment and to source and align private funders to projects to promote mutual benefits.

  • Natural Capital: Galbraith’s expert advisers guide our clients in realising value in all land uses – by assessing and measuring natural assets, furthering opportunities in biodiversity net gain, and ensuring stakeholders are rewarded fully for their investment in and contribution to delivering ecosystem services and net-zero outcomes.