Financing Regenerative Agricultural Transitions
Given the costs farmers face when transitioning to more holistic agricultural management, strong financial incentives will be important catalysts for wide-scale transition. In addition, developing or adapting infrastructure to support regenerative systems will also require significant capital. I see three major categories of financial incentives to develop:
- Market Demand must be cultivated to ensure sufficient demand and perhaps price premiums
- Ecosystem Payment Markets such as carbon sequestration credits to (1) provide additional sources of revenue and (2) compensate farmers for the ecosystem services they are providing with regenerative agriculture
- Transition Financing in the form of loans and grants to support farmers and processors with the initial costs of transition
Market Demand
To transition, farmers need to know that they’ll be paid for their efforts, that someone will buy what they grow at a reasonable price. But a strong crop rotation might include oats, buckwheat, lentils and other crops that aren’t typically grown in their area and might not have a valuable market. Thinking about the value chain, there are several areas to help support and build demand.
One way is for companies enter into long-term contracts with growers, which provides certainty about demand for farmers that are transitioning. General Mills’ Annie’s division is circumventing middlemen in the supply chain and contracting directly with farmers to advance regenerative practices. Many other companies are doing this with organic. Costco also enters into long-term contracts with growers to keep up with the demand for organics (25% of their produce sales are organic).
Pipeline Foods is a company that is investing in supply chain infrastructure for grains, pulses, and oilseeds, and offering services supporting transitioning farmers. They are increasing access to demand.
Another route is to create demand for certain products. This National Geographic article on organic farm transitions cites an example of Earthbound Farms capitalizing on the no-carb trend by marketing cauliflower rice. Cauliflower is a brassica, which suppress fungal pathogens, but are lower value crops than strawberries, which benefit from growing in rotation with brassicas. By developing demand for the product, Earthbound was increasing their capability to farm in an ecosystem-positive way. The lentil farmers of Montana similarly worked on creating more demand for their lentils. For example, they worked with chefs to popularize black beluga lentils, named after caviar. Ideally, we want to support whole farm eating — ensuring that there is balanced demand for all crops that are needed for a healthy farm ecosystem. There are a lot of ways to think about end consumer (or eater) demand (more here).
One potential avenue for market demand is capitalizing on the carbon sequestration benefits of true regenerative agriculture. Many companies are making sustainability commitments about their carbon impacts, which could drive changes in purchasing decisions toward regenerative. Furthermore, institutional investors are starting to incorporate Environmental Social and Governance (ESG) requirements into their investing decisions, driving more standardized reporting about climate impacts and business risks from climate impacts.
Ecosystem Payment Markets
Carbon sequestration and climate change resilience are two of the major benefits that regenerative agriculture offers and represent a great opportunity for farmers to be paid for the ecosystem services they are providing.
Carbon trading schemes are already active in many marketplaces, including California, and are likely to grow in the future. However, the current carbon prices are not high enough to provide an economic incentive for farmers. Part of the barrier is that it’s costly to measure and account for soil carbon sequestration, especially because sequestration will vary dramatically on different land, with different growing practices, and in different seasonal climactic conditions. Luckily, there are many organizations working on the measurement question, including the Carbon Cycle Institute / Marin Carbon Project and the USDA’s Natural Resources Conservation Service (NRCS), which offers the COMET tool to help estimate carbon sequestration. There’s still a ways to go with measurement, and the next step beyond that is increasing the value of carbon credits to provide sufficient financial incentive for farmers. That most likely requires a larger policy conversation about how we handle carbon in our economy.
Nori and Regen Network are two new organizations that are attempting to address both carbon prices and measurement methodology with blockchain technology. Regen Network is working on the measuring the benefits of regenerative ag, including carbon sequestration, water quality, grassland health, and pollinator density. Nori believes that they can create a blockchain-based marketplace for carbon credits that will cut out a lot of the bureaucracy that might result in low carbon prices.
Aside from carbon trading, we can also develop other financial incentives for the ecosystem benefits and climate resilience offered by regenerative ag. The USDA’s NRCS Conservation Programs such as the Environmental Quality Incentives Program (EQIP) and Conservation Stewardship Program (CSP) already do a little of this by funding specific initiatives and practices, but the programs are oversubscribed and underfunded.
Another way to do this is to offer lower crop-insurance premiums for farmers who are actually reducing their likelihood of needing crop insurance by growing more sustainably. The provision to do this was included in the Senate version of the 2018 farm bill, but ultimately, did not make it into the final version. Outside of government incentives, some private sector firms are starting to use ecosystem services valuation to quantify the value of their regenerative practices. Farmland LP, in partnership with Delta Institute and Earth Economics, released a report valuing the ecosystem services from their regenerative farmland management fund at $21.4m. The report is part of a movement to build the value of ecosystem services into financial valuations.
Transition Financing
Regardless of carbon credits or other ecosystem service payments, there’s still a need for transition financing to support the investments farmers must make as they transition to regenerative practices. While studies show that after an initial transition period, organic or regenerative farming can be just as or more profitable than chemical-industrial farming, most farmers may not have the financial cushion or the appetite for risk to wait several years to return to current profitability levels. And they may have trouble obtaining financing from banks for a business model that’s relatively unproven.
There seems to be a need for patient capital that’s willing to give loans or grants for fund these transitions. Luckily there are a lot of financial capital — foundations, family offices, and other investors — that are starting to be very interested in regenerative. The key is to build avenues for these investors, who may know very little about farming, to provide capital to the space. Koen van Seijen has a podcast called “Investing in Regenerative” and provides some great perspective on what investors can do and examples of funds that are doing just that. Many of these funds do some level of capital provision as well as providing consulting services to help farmers transition. More of these types of investments and the accompanying expertise will be crucial in helping to finance the transition to regenerative.
Another potential source of capital is from buyers of agricultural products. In this Food and Finance Keynote, Ethan Soloviev cites a jojoba farm in Arizona, which partnered with a cosmetics company to transition from organic to regenerative. The cosmetics company provided capital and support to manage the transition, as part of the company’s sustainability goals.
Of these three categories of financial incentives, I think both market demand and transition financing are critical. It is possible that a very large amount of transition financing and other financial incentives like ecosystem payments could create wide-scale change without market demand, but this is unlikely.
Additional Reading:
This is part 6 of a series, written in January 2019
1. Introduction: The Magic of Regenerative Agriculture
3. Defining Regenerative and who’s doing it
5. Farm-level transitions (local learning and infrastructure)
6. Financing Regenerative Agricultural Transitions
