The world’s growing population raises concerns about future food security. At the same time, environmental challenges such as climate change, biodiversity loss, and the depletion of natural resources must be addressed, calling for a transformation of agriculture. This need is exacerbated by the limited availability of land suitable for arable farming. In this study, we examined the potential of agricultural land for arable farming and grassland use in Switzerland, under the premise that agricultural land use should align with the biophysical and environmental capacity of each location. In an iterative co-design process with scientists and public authorities, we elaborated three scenarios for agricultural transformation, which progressively incorporated (i) biophysical constraints (soil, climate, and topography) and (ii) environmental constraints (soil loss and eutrophication due to risk of erosion), as well as (iii) greenhouse gas emissions from drained organic soils. Our results show that the allocation of 40% arable land and 60% grassland in the most restrictive scenario closely resembles the current distribution (46% and 54%), respectively. However, the scenarios also revealed significant spatial shifts between arable land and grassland at the local level: only two-thirds of today’s arable land areas match their natural site conditions. Evidence from this study underscores the critical importance of site-adapted transitions of agricultural land use and the need for site-adapted management alternatives for farmland presently assigned to inadequate land use. Overall, this research provides a novel contribution by allowing the identification of hotspot areas for agricultural transformation at the local scale. We show that these site-specific land use analyses are essential for guiding effective land use planning and policy advice that strengthen the integrity of environmental performance and agricultural productivity, and support the development of targeted and sustainable land use strategies.