Transforming Infrastructure: Catalysing the Regenerative Agriculture Transition in the US Midwest
Through TransCap’s prototyping work, we strive to make systemic investing more tangible and actionable. This article builds on parts one, two, and three by sharing further insights from our regenerative agriculture prototype. It also integrates key hallmarks of systemic investing (Combinatorial Effects, Nesting, Leverage Points, etc.) within the context of regenerative agriculture. In doing so, we aim to refine and clarify these concepts, enhancing their practicality and relevance across various socio-technical systems.
In this blog, I will argue for the need for combinatorial effects — when two or more assets stand in strategic, mutually reinforcing relationships with each other — to transition the agricultural system in the Midwest region. Amongst many possible combinatorial effects, I will focus on transition financing that directly supports farmers willing to adopt regenerative practices with investments to upgrade the infrastructure necessary to process and distribute their products. By strategically aligning these investments, we create a conducive environment where regenerative agriculture can thrive.
Intro:
Applying a system lens to the transition implies considering the entire ecosystem that supports farming, extending well beyond the farmgate. The promise of regenerative agriculture — to rehabilitate the land, increase biodiversity, and reduce our carbon footprint — is within reach. Yet, this ambition encounters significant obstacles when faced with an infrastructure that remains largely outdated and unsuited for regenerative crop diversity and type.
Drawing a parallel with the energy sector’s shift from fossil fuels to renewables, which necessitates substantial changes to the electrical grid, agriculture, too, requires a fundamental transformation to its processing and distribution network. Just as a more diverse and distributed energy grid is key for accommodating renewable energy sources, so must agricultural infrastructure evolve to support a wider variety of crops. Crucially, the development of this infrastructure requires substantial capital investment.
The regenerative production line:
Regenerative farmers introduce different crops to their production line, including legumes, tree nuts, various grains like millets and sorghum, and/or livestock for rotational grazing. However, for these farmers to effectively sell their crops, they require access to a range of facilities capable of handling these diverse crops. These facilities include storage elevators, mills, slaughterhouses, and traders, all of which need to be adequately equipped and certified to process regenerative products.
A significant modernisation of our “middle infrastructure” is needed to bridge this gap. This term encapsulates the processing facilities, logistic networks, and marketing platforms that collectively form the backbone of our food system. Investing in this infrastructure means upgrading and building new facilities to manage a broader array of crops and cultivating markets where these products are in demand.
The missing middle:
This challenge is anything but straightforward. The market uncertainty for regenerative products extends well beyond the confines of the farmgate, impacting the development of essential processing and distribution facilities that support this burgeoning sector. The CREO Syndicate has highlighted that midstream infrastructure frequently receives the least investment in the financing landscape of the regenerative agriculture sector.
Why?
We turn to our systems diagnosis to understand the dynamics at play, learn about the possible factors that reduce investment in this area, and hypothesise potential enablers that could unblock capital and de-risk investments.
Firstly, investments in large-scale infrastructure projects, regenerative or otherwise, inherently require significant CAPEX and carry a complicated set of risks, such as operational, market, financing, legal and regulatory risks.
This situation is exacerbated by the regenerative context: the inherent diversified production of regenerative farming results in lower volume per crop than monoculture production. This factor, combined with the lack of a futures market for regenerative products, results in low future price predictability, meaning farmers and processors of regenerative products face inherent revenue risk. This is further complicated by the lack of maturity for regenerative products, which increases the demand side risk of the operation. This vicious cycle creates a challenging investment environment for new or updated processing and distribution facilities for regenerative agriculture.
The development of supply chains further encounters a classic chicken-and-egg dilemma: Farmers who embrace regenerative practices and frequently diversify their crop portfolios face challenges due to the absence of robust supply chains for the new crops they produce. On the other hand, without clear supply signals for these products and demand signals from end consumers, investors and operators in processing and distribution facilities may hesitate to commit significant capital investment required for constructing new or modifying existing facilities.
Combinatorial effects and nesting interventions within broader systems change efforts:
Because of the vicious loop described above, we hypothesise that investing in regenerative infrastructure demands more than just capital infusion; it calls for a holistic investment strategy where investments are sought based on their combinatorial potential. For example, investing in farms producing a variety of crops in concert with the infrastructure needed to process these same crops can create a symbiotic relationship between production and processing. This synergy can de-risk the investments in growers and processors concurrently, increase efficiency, reduce transportation costs, and enhance profitability for the entire value chain.
These interventions can be further nested within broader systems initiatives. Such “nesting” aims to ensure that the portfolio of real-economy assets is well aligned with a broader set of system interventions designed for their collective, synergistic ability to generate transformative dynamics.
One example is to nest investments in this missing middle with interventions like Advance Market Commitment and Public Procurement Programs. These interventions guarantee future demand for farmers and processors/distributors of goods. For instance, if a government mandates that all public hospitals and schools procure a specified percentage of their food from regenerative sources, it sends a strong signal to farmers and infrastructure providers about the expanding market for regenerative agricultural products. The ensuing benefits are substantial: farmers experiencing stable cash flows are better positioned to secure financing and insurance. Furthermore, this financial stability enables them to reduce reliance on high-cost agrochemical inputs, thereby lowering overall production expenses.
Another example that directly tackles the CAPEX needed for new infrastructure projects is “The Local Meat Capacity Grant Program”, supported by the American Rescue Plan Act. This program was designed to aid independently owned meat and poultry processing businesses by offering grants to cover up to 75% of processing expansion projects or equipment purchases. The grant aims to improve processing options for local livestock producers by modernising facilities and increasing their capacity. Although meat consumption is contentious, having distributed small-scale processing facilities allows local farmers to use integrated crop-livestock management techniques that have been shown to positively affect soil health, biodiversity, pest management and reduced animal feed needs (read more here). The important point is that nesting infrastructure investment in initiatives already in place offers the possibility to de-risk private investments and direct public funding to best use cases, as seen in this case, since up to 75% of the investment needed could be publicly sourced.
For additional examples of nesting opportunities within the food and agriculture space in the U.S., you may explore the USDA’s catalogue of programs here. This requires that investors no longer see the world around them as exogenous but instead develop a consciousness about their agency and a capability for collaborating with societal actors with whom they haven’t routinely crossed paths.
Conclusion:
As we have seen, investing in the missing middle is critical and challenging. It is clear that only channelling funds into infrastructure, while beneficial, does not suffice to instigate new systemic dynamics. A diversified portfolio of interventions is crucial to enhance the likelihood of success and increase the scale of capital deployment. Such a portfolio effectively leverages combinatorial effects within and nests it with ongoing activities across broader systems. By doing so, we hypothesise that this strategic approach will guide the system towards adopting a new set of rules and behaviours that can create new positive feedback loops, thereby initiating positive feedback loops that reinforce the transition.
The journey towards a regenerative agricultural system extends far beyond the field. It requires a concerted effort to upgrade our infrastructure, build supportive markets, establish fair partnerships, and foster collaborative initiatives. By targeting these pivotal areas, we can unleash the full potential of regenerative agriculture, paving the way for a future in which farming practices sustain and rejuvenate our planet.
Citations:
CREO Syndicate. (2021). Unlocking Investments in Regenerative Agriculture. Retrieved from: https://forainitiative.org/unlocking-investments-in-regenerative-agriculture/
Croatan Institute. (2022). Investing in Regenerative Agriculture Infrastructure Across Value Chains. Retrieved from: https://croataninstitute.org/investing-in-regenerative-agriculture-infrastructure-across-value-chains-2/
Rodale Institute. (2019). Literature review: Crop-livestock integration. Retrieved from https://rodaleinstitute.org/science/articles/literature-review-crop-livestock-integration/
USDA programs in the local food supply chain. (2021). https://www.ams.usda.gov/sites/default/files/media/FoodSupplyChainFactSheet.pdf
