A new KPMG analysis quantifies how climate and water quality regulatory policies may curtail agricultural production, sharply impacting farm viability and the broader rural economy.

Farmers are acutely aware of increasingly onerous environmental regulations in both ‘soft’ (carrot) and ‘hard’ (stick) forms.

‘Hard’ regulations include statutory management requirements that set mandatory conditions; the Nitrates Directive is a prime example. Also relevant are ‘soft’ regulations that set expectations or incentives for farmers to undertake voluntary actions.

Initiatives to encourage the uptake of decarbonisation measures fall into this category, as do schemes such as Organic Farming and ACRES. In this context, farmers can choose actions that fit their circumstances and will often improve both environmental and financial performance.

Farmers have responded positively to the incentive approach, and reductions in agriculture’s carbon footprint are evidence of this progress.

Potential harder regulation

However, the challenging, legally binding climate and water quality targets are a source of future regulatory risk. If voluntary mitigation falls short, the industry must contemplate a worst-case scenario of ‘harder’ regulation, including measures to lower livestock numbers.

The KPMG analysis suggests that, even with ambitious uptake assumptions, MACC mitigation measures will likely deliver only around half of the required 25% reduction in agriculture’s carbon footprint. Consequently, it concludes that the remainder of the target could involve livestock cuts, including a 12% to 15% reduction in dairy and beef numbers.

The report highlights the intersection of environmental policy across nitrates, low-input farming and climate themes. Here, there is an implication that the loss of the nitrates derogation could trigger an 8% decline in dairy cow numbers, potentially becoming the primary driver of herd reductions in parallel efforts towards the decarbonisation target.

The KPMG financial assessment is sobering, with the economic output of the agricultural sector reduced by €1.4bn in a combined policy scenario.

The embedded nature of farming in the rural economy means that a reduction in agricultural output has knock-on effects for the many supporting input supply and processing businesses, magnifying the output and employment implications.

The overall loss to output in the economy, accounting for these multiplier effects, is likely to be almost double the direct reduction in farm output.

Specifically, the analysis highlights the implications of lower throughput on processing sector efficiencies and the broader threat to jobs across the value chain.

Land market effects and notable vulnerabilities in particular sectors, such as sucklers and tillage, have localised implications

Behind the headline figures are the effects on individual farm families. Measures that lower agricultural productivity threaten farm income viability unless suitable compensation or diversification options are available.

UCD research shows that profit margins of more intensively stocked dairy farms could fall by 50% if they no longer have access to a nitrates derogation.

Moreover, while environmental policy ambition has increased, the CAP budget has not kept pace with inflation or the magnitude of the challenges.

Instead, CAP reform has focused on the distribution of payments across farms, and the report highlights the geographic shift in CAP support, especially from east to west.

The report provides a timely overarching assessment of the main policy challenges, particularly climate and nitrates. It indicates that accelerated uptake of mitigation measures remains the best defence against more costly environmental regulations that would curtail production.

Also significant is the variation in impacts across farms and regions, linked to factors such as soil type, stocking rate, farming system and the geographic concentration of businesses in the supply chains. Similarly, land market effects and notable vulnerabilities in particular sectors, such as sucklers and tillage, have localised implications.

The ‘just’ transition is a core principle of climate policy, and regulatory impacts on agriculture and the broader rural economy merit additional consideration through that lens.