Agribusiness News November 2022 – Management Matters

Getting the economics right towards a sustainable food system

It is fair to say the events of 2022 has led to the reckoning of the modern industrial food system.  Businesses in the UK agriculture sector are facing inflation of over 25% and price hikes in the region of 200% for fertiliser, gas and fuel, and a raft of other cost pressures on feed, electricity, and seeds, as a result of the combined impacts of inflation, Brexit, and the War on Ukraine on supply costs to the industry.  The record-breaking heatwave this summer has put further stress on crops that rely on rainfall, such as cereals, and require more careful water management of crops reliant on irrigation, such as potatoes.  These geopolitical and climate shocks have drastically diminished farmer’s profit and loss margins, threatening the financial viability of farms that are carbon-intensive and vulnerable to climate change.

Well before these crises forced their economic reckoning, the modern food system needed to reform its existing practices.  The UK is ranked in the lowest 10% of countries globally when it comes to biodiversity, impacted by centuries of agricultural intensification which have taken a large ecological toll on our natural systems – depleting soils of nutrients, polluting rivers and degrading habitats. Indeed, the very methods that made agricultural areas productive such as field amalgamation, and a move away from mixed farming with the use of artificial fertilisers – now face serious challenges in terms of their long-term economic and environmental viability.

To support farmers through these inflationary challenges, NatWest confirmed a £1.25billion lending package for farmers this summer through a range of measures including favourable loans, asset finance and increased overdraft limits, taking our total lending capacity to the agriculture sector to over £6.7billion.

Our lending support also aims to help farmers fund their transition to more sustainable practices, through the bank’s Green Loans that will help farmers access low-carbon equipment and adopt more sustainable practices at low interest rates.

Though green loans are meant to reduce farmer’s long-term costs on fossil fuel inputs, farmers are reticent to take these loans when it is still unclear whether and how they will be able to repay them.  Farmers are unable to pass the full magnitude of their inflationary costs to their buyers to cover their operational costs, let alone taking more debt to cover new capital equipment.  The proposed agricultural subsidy reforms are still unclear on whether they will provide sufficient financial incentive for farmers to change their farming practices to become more sustainable.

There are essential ingredients needed to get the economics right for a sustainable food system transformation.  First, a common set of metrics that defines the environmental outcomes farmers need to achieve must be adopted across the food system – from farms, food manufacturers and retailers, policy incentives and financial solutions.  Second, farmers need to be financially rewarded for achieving these environmental outcomes.  Agricultural subsidy reforms should be structured at levels that give farmers the confidence to buy equipment and adopt sustainable, regenerative agricultural practices.  Food manufacturers and retailers’ procurement and payment terms should also reflect the willingness to pay for these environmental outcomes.  Finance from banks but also more innovative financial instruments can more easily be deployed to farmers when there is clear investment case to pay for environmental outcomes.  We are working with farmers, government, businesses, financial institutions, and civil society to get the economics aligned to support the transition to a net zero, environmentally sustainable and healthy food system for the UK.

Maria.Carvalho@natwest.com