The last decade saw a significant increase in the demand for land among dairy farmers. The first wave of this was for expansion, as dairy farmers were no longer restrained by milk quotas.

According to the National Farm Survey, average dairy farm size increased by 18% between 2014 and 2022, the last year with published data.

Over the last 12 months there has been a second wave of land accumulation by dairy farmers, but this time it is driven by regulation, rather than expansion.

The key policy instrument driving this change is the nitrates directive, or more specifically the changes to the nitrates derogation, usually referred to now as simply the derogation.

To recap, it allows participating farmers to stock their farms higher than the EU wide rule of 170kg N/ha.

A small number of countries are granted this derogation based on strict criteria and, in return, participating farmers must comply with additional measures over and above what other farmers must comply with.

Stocking rates

Not to be confused with chemical fertiliser rates per hectare, the derogation is all about stocking rates or how many head of stock can be carried on a farm.

Every animal is assigned an organic nitrogen excretion rate. For dairy cows, this varies depending on milk yield (known as banding). For a cow in the middle band, which is where the majority of herds are, the excretion rate is 92kg N/ha per year. For a suckler cow, the rate is 65kg N/ha per year.

The EU-wide limit is 170kg N/ha so for a dairy farm in the middle band, this means they can carry 1.84 cows per hectare, which is less than one cow per acre – a traditional productivity target. The derogation allows farmers to exceed this.

The upper limit used to be 250kg N/ha but this has been reduced to 220kg N/ha in most places for 2024. Hence, farmers that were stocked higher than this have had to source more land or else reduce stock numbers.

Threats

Looking ahead, there are big threats hanging over the derogation, particularly in the south, east and midlands where nitrate levels in rivers and estuaries are higher than the EPA say they should be. In their defence, farmers and science-based organisations like Teagasc say that other measures being introduced on farms will have positive impacts on water quality.

If water quality doesn’t improve, there is the possibility that the derogation for Ireland could be gone at the next review at the end of 2025. In the Netherlands, the derogation was phased out over a four-year period and farmers there won’t have any derogation by the end of 2025.

It should be acknowledged that there was little internal political will to maintain the derogation in the Netherlands, so that may have contributed to the derogation not being granted past 2025.

So what is likely to happen to the demand for land in Ireland over the next number of years? Before answering that, it’s important to say that the business dynamics around leasing land is totally different if taking on land due to regulation as opposed to business opportunities.

The first wave of dairy expansion was driven by business opportunities, with preference given to land adjoining the milking parlour enabling an increase in cow numbers. For farmers that were running good farms and had the ambition to expand, this made sound business sense and taking on this land created a return or increased wealth.

Farmers offered this opportunity needed to weigh up the options based on the quality of the land, proximity to milking parlour, how much investment was needed in the land; these factors determined how much they would be willing to pay for it.

Compliance

The contrast with taking on land due to regulatory compliance is that the fundamentals are totally different. Faced with a cut to the derogation, affected farmers will not be taking on land because there is an opportunity to milk more cows, but rather to hold on to what cows they already have. They will not be taking on land to generate wealth creation, but rather to avoid a loss of wealth.

In the main, farmers will not need the additional land for productive reasons – most are growing enough feed for their stock as it is. Additional land required for nitrates does not need to be adjacent to existing land – it can be anywhere, although farmers may be asked to prove that slurry is being spread on it, so location could prove important.

The quality of the land or how much pasture it grows isn’t a consideration either, as every hectare of grassland is treated the same when it comes to nitrates. Essentially, it is hectares on a map that affected farmers require.

This is a fundamental change compared to the first wave of dairy expansion and goes somewhat to explain the increase in prices paid for all land types leased in 2023, as farmers that were affected by banding or the cut in the derogation sought additional land to avoid having to cull dairy cows.

Complex

The reduction in the derogation to 220kg N/ha affected 2,000 dairy farmers, a relatively small number, but it has had a distorting impact on the land rental market. If the derogation was to be lost, then the impacts would be far greater.

To put it in context, a farmer in the middle band for milk production milking 100 cows and stocked at one cow to the acre, or 2.5 cows/ha would need an additional 2ha to be compliant with 220kg N/ha. However, the same farmer would need an additional 14ha of land to be compliant at a new limit of 170kg N/ha if the derogation was lost.

The impact on farm finances of leasing 2ha of land at high rates is very different to the impact of leasing 14ha of land at high rates. For the farmer in this example, leasing an additional 2ha at €400/acre will cost the farm €1,977 per year. Leasing an additional 14ha at the same money would cost the farm €13,837 per year.

At that rate, affordability is an issue and the alternative option of reducing cow numbers would need serious consideration. Either way, losing the derogation would have a catastrophic impact on dairy farm finances either through increased land leasing costs or lower output because of fewer cows.

There are myriad scenarios to be considered when trying to predict the future lease price for farmland. For example, will the supply of land increase as farmers exit dairying or retire from other sectors? Will milk price and profitability improve thereby enabling farmers to pay more for land? Or will the reduction in dairy farm profitability if the derogation is lost set a new, lower bar for land prices?

These are complex considerations. We can say for certain that if the derogation is lost, the demand for land will increase. However, that doesn’t mean dairy farmers will pay any more for it. Unless margin improves, they simply won’t be able to afford to take on more land at current land lease prices, let alone at higher prices.