Annex C: indicative economic assessment of the 170kg/N/ha/yr limit of the Control of Agricultural Pollution Regulations: executive summary

This report presents indicative estimates of the number of Welsh farms potentially affected by the annual limit of 170kg of nitrogen (N) from livestock per hectare per year prescribed under the Water Resources (Control of Agricultural Pollution) (Wales) Regulations (hereafter CoAP). Indicative estimates of the aggregate farm-level and supply-chain costs of compliance are also presented. The findings presented may contribute to any future Regulatory Impact Assessment (RIA).

The analysis presented draws pragmatically upon best available data. However, estimates must be treated cautiously as offering indicative insights rather than definitive conclusions. This reflects multiple data uncertainties and limitations inherent to the modelling approach and its assumptions. As such, results should be interpreted with care, considering their caveats, context and need for further research. 

For example, reported June Agricultural Survey (JAS) livestock data do not align perfectly with CoAP categories, farm areas and livestock numbers vary across different official data sources, and average unit costs for exporting N, renting land and/or destocking to comply with the 170kg N limit may not reflect local circumstances.  Equally, multiplier analysis of wider supply-chain effects necessarily involves additional assumptions.  Such caveats are noted and discussed throughout the report.

Moreover, the analysis focuses solely on the 170kg N limit but Welsh farms are also subject to other related regulatory controls.  These include minimum required slurry storage capacity and prescribed timings for slurry applications but also importantly constraints related to phosphate (P) levels from livestock sources (under Environmental Permitting Regulations 2010, EPR). However, data limitations mean that an assessment of these combined regulatory changes was not possible. 

The uniform 170kg N annual threshold is one element of a package of measures to reduce nitrate and phosphorus emissions.  Such measures address short-term risks of substantial retrospective EU infraction costs and longer-term EU competition requirements to maintain a Level Playing Field.  Variation in regulatory approaches is compatible with the latter provided that equivalence of outcomes is maintained.  However, whilst the EU-UK Trade Cooperation Agreement allows for regulatory divergence, failure to maintain equivalence would potentially threaten UK farm exports to the EU (worth c.£2.8bn in 2023, of which c.£0.3bn were Welsh and much of it livestock related).

The various interacting uncertainties are accommodated analytically by approximating lower and upper-bound situations.  Estimates are shown for farms in receipt of public support payments in 2019, for all farms and then for only commercial units.  As a base year, 2019 represents the position before farms are likely to have adopted mitigation measures, meaning that estimated CoAP effects will not be diluted by any more recent changes to management practices.

The headline results are that only a minority of farms overall are estimated to potentially be affected. However, farm-type strongly influences the likelihood of an individual farm being impacted.  In particular, as would be expected, poultry and dairy farms are more likely to be affected since their management systems tend to be more intensive.  Lowland arable and upland grazing farms are less likely to be affected. 

The estimated likelihood of being potentially affected also increases with farm size, as measured by Standard Labour Requirement. This reflects the tendency for larger farms to have greater livestock numbers managed more intensively. Similarly, the estimated proportion of commercial units potentially affected is higher than that for all farms, reflecting that the latter includes many small units with relatively low stocking densities whereas commercial units tend to be larger and managed more intensively.

The difference between lower and upper-bound estimates is relatively narrow for most farm-types.  However, they do differ more markedly for the two most affected farm-types of dairy and poultry, ranging from c.33% (462 farms) to c.63% (843 farms) and c.41% (40 farms) to c.51% (50 farms) respectively for commercial units.   This reflects sensitivity to assumptions regarding livestock categories and therefore nitrogen coefficients.  In particular, the assumed milk yield band for dairy cows has a strong influence.  Many poultry units will also already have mitigation measures in place whereas dairy farms will not.

Mitigation measures for affected farms to achieve compliance with the 170kg N limit include exporting excess N, renting-in additional land and destocking.  The latter is the most disruptive and costly to implement, and hence is less likely to be chosen than either renting-in land or exporting N.  Estimated aggregate farm-level costs if all mitigation was through destocking are c.£46m to c.£113m. Impact cost estimates necessarily assume all affected farms adopt only the mitigation measure under consideration. In reality, farms will likely adopt a mixture of approaches to suit their particular circumstances. 

The equivalent figures for only renting-in land or only exporting N are c.£10m to £22m and c.£6m to c.£14m respectively (although land rentals also represent a possible income stream for other farmers).  However, where the local need for additional land to rent or to export excess N to is high, such as in South West Wales, it would be expected that local prices and export haulage distances would rise. 

On-farm mitigation measures have implications for the wider supply-chain.  For example, most notably, destocking directly implies lower demand for upstream suppliers’ inputs and lower availability of raw materials for downstream processors.  Renting-in land and exporting N have less direct implications but would still be expected to generate some knock-on effects.  For example, land rented-in may previously have been used for other purposes whilst exporting is an additional work task to be accommodated.

Although supply-chains linkages (including cross-border flows) are not known with certainty, illustrative economic multiplier analysis suggests that destocking would result in c.£64m to c.£156m of lost Welsh Gross Value Added (GVA), predominantly from the dairy sector.  The equivalent figures for renting land are c.£25m to c.£56m (albeit possibly partially offset by rental income to other farmers) and c.£7m to c.£17m for exporting excess N.  This again highlights destocking as the costliest mitigation measure.

Illustrative multiplier analysis also suggests reductions in labour requirements across the supply-chain.  These are based on farm-level SLR, which mask considerable variation in efficiency across farms and productivity improvements over time. It also assumes an optimistically short notional working year for farmers of 1900 hours.  As such, estimated changes in SLR totals should not be interpreted literally in terms of numbers of jobs but rather as an indication of the relative magnitude of pressures for change. 

The lower and upper-bound estimates for reductions in SLR associated with destocking are from c.1560 to c.5501, and c.579 to c.2374 for renting-in land (the effect of displacing its previous use).  Exporting N is assumed to not cause any reductions. Again, this highlights the relative ranking of destocking as the costliest mitigation measure but also the sensitivity of estimates to underlying data uncertainties.

The choice of approach taken by any farm will depend on the individual farm circumstances and local opportunities; a mix of mitigation measures would be expected across the population.  Some farms may undoubtedly decide to cease trading, retire or change enterprise.  Yet reducing stock numbers, changing enterprise mixes or exiting the industry are unlikely to be triggered solely by the issue of N loading.  Other factors associated or not with CoAP regulations may also play a part in any such decision.  For example, additional slurry storage requirements, the need to invest in a new parlour, lack of profitability, ill health. 

Nonetheless, in practice, reducing herd size is unlikely to be the first-choice compliance option in most cases.  Moreover, even if chosen it is unlikely to involve a pro-rata reduction in all livestock categories.  Rather, more nuanced changes in herd composition, such as contracting-out heifer rearing and culling less productive animals, may be preferred. Such adjustments are likely to mitigate impacts to an extent. 

Equally, whilst renting-in land and exporting excess N are more attractive compliance options, their practicality depends upon the local availability of land. In-turn, this will be influenced by factors beyond CoAP, including general buoyancy of the rural property market and pressures for woodland creation. 

Notwithstanding their necessarily purely indicative nature, the estimates presented in the report are sufficient to reveal likely relative impact patterns and magnitudes.  Refinement of estimates and/or a future RIA would require additional, more robust data and/or some ground-truthing of results.  For example, in relation to the milk yield band of individual dairy farms, the monthly livestock headcount of individual farms, the number and size of livestock farms, and actual supply-chain linkages.  Although it is more likely that more heavily stocked farms will be constrained by limits on P, any quantitative assessment of the potential impacts of limits on phosphate applications will require collation of soil P index scores across Wales.  The particular vulnerability of the dairy sector is apparent and merits further research.