Inside Kilter Rural’s new fund strategy as it farms for impact

Kilter Rural, the Australian impact investor with around A$365 million ($234 million; €221 million) in assets under management, is now well underway with implementing the strategy for the Kilter Agriculture Fund, its new flagship investment vehicle.

The firm is a well established Australian farmland and water asset manager, which operates two open-end water funds and a closed-end farmland vehicle known as the Australian Farmlands Fund. It launched its latest fund, the open-end Kilter Agriculture Fund, in April 2023, targeting up to A$500 million. Kilter Rural held a first close for the fund soon after, and it has now reached A$64 million in AUM.

The capital raised to date has been used to purchase a collection of assets in the southern Riverina region of New South Wales, close to the Murray River, which together cover around 7,500ha.

Agri Investor recently visited the sites to see first-hand how Kilter Rural will put its strategy into action, transforming decent assets into higher-value ones. The firm also intends to demonstrate that it is possible to run an operation of this scale with net-zero carbon emissions – and possibly achieve a carbon-positive outcome over time.

Why farm with impact?

In the town of Tocumwal, after we disembark from a short flight from Sydney, Kilter Rural CEO Cullen Gunn outlines how the firm intends to deliver change on its seed asset so it can deliver sustainable food production at scale with positive biodiversity outcomes.

The assets together comprise a mixed farming facility that will be home to irrigated and dryland cropping, and is set to generate high-integrity biodiversity and carbon credits.

To begin with, Kilter Rural has leased out the assets to their existing operators at a 4.5 percent yield, in order to de-risk the fund’s entry into the market, and so the assets are generating a return for investors from the beginning. But the aggregation’s unusual scale (for this area) and its access to three sources of water, as well as the presence of more than 20km of waterways across the footprint of the properties, provide the firm with a chance to introduce changes that can have a significant impact.

“We like these environments because they give us enormous scope to optimize [operations],” Gunn says. “These landscapes, because they’ve been used for mixed farming, have terrific environmental assets, massive forests and trees that just haven’t been cleared for whatever reason. When you talk about biodiversity loss and carbon emissions in Australia, land clearing is still the big issue.”

One of the main ways Kilter Rural transforms landscapes is through irrigation, although Gunn acknowledges this is not possible everywhere. These assets are located within the Murray Irrigation Area and have high-quality groundwater bores on the site, opening up opportunities in that area.

“That doesn’t mean we’re going to have a huge irrigation program, but we will increase it and optimize it, which is really important to changing value,” he says.

Gunn outlines the tailwinds behind Kilter Rural’s strategy, as he sees it, and why he thinks this approach to farming is the right one.

“Firstly, we want to be profitable in the long term – that’s intergenerational farming. We’re trying to set something up here that lasts for the long term and is sustainable on the back of protecting key natural capital assets, like biodiversity, soils and water,” he says.

“The other thing that is going to happen from 2030, which is really fundamental, is that is the time that most corporates have set targets for emissions reduction. It doesn’t mean they all have to be neutral by then, but that is when their targets will start pressuring producers and suppliers to come up with ways to remove or reduce their liability around carbon – and that will also happen around biodiversity.”

This means that primary producers, including farmland asset managers like Kilter Rural, will have an important role to play, he says.

“We can see a time where the preference will be for those who can provide food and fiber to you with the lowest emissions intensity. I don’t think that, in the future, just producing meat where you’ve bought an offset to cover the [emissions of a] cow, where that doesn’t deal with any Scope 2 or Scope 3 emissions, [will be preferable].”

Gunn predicts that customers will ask producers like Kilter: how are you getting your emissions down?

“And I think biodiversity will be similar, and it will come more quickly.”

What are Kilter’s interventions?

In broad terms, the three planks to Kilter’s strategy sound relatively simple: pursuing aggressive agronomic interventions to improve soil health and reduce reliance on inputs; deploying biotechnology from Loam Bio to deliver stable soil organic carbon sequestration; and environmental interventions in the form of revegetation projects on a significant percentage of the farmland.

“We want this fund to be a catalyst for change. There are some key interventions that we’ll undertake to turn a business-as-usual cropping regime into a carbon-neutral or net-zero one,” Gunn says.

First are the agronomic interventions, which Gunn says “aren’t necessarily groundbreaking”, just requiring capital, knowledge and the willpower to implement them.

These interventions are designed to maintain healthy soil function as much as possible, and include: minimizing soil disturbance through no-till farming and other technologies; growing a diverse range of plant species through crop rotation and intercropping different species alongside each other; maintaining living root systems through the year with irrigated double cropping where feasible; maintaining soil cover by maximizing stubble retention and/or cover cropping; and integrating livestock where feasible for nutrient cycling.

Gunn says employing these methods can reduce the emissions intensity of a cropping regime by up to 40 percent “very quickly.”

“This is stuff everyone could do, but for a whole variety of reasons, don’t. So when we’re talking about being a flagship for change, this becomes really practical,” he says.

Angus Ingram, investment manager with Kilter Rural, who takes the lead on much of the on-farm agronomic interventions, says that putting all these elements together, even if each seems relatively straightforward in isolation, is “fundamental” to building soil carbon.

Otherwise, he says: “You’re simply driving with one foot on the accelerator and one foot on the brake.

“I would say it would be very much in the single-digit percentage of Australian farmers that are doing all five of these things. We know for a fact that we had soil organic carbon levels at, broadly, 5-6 percent 150 years ago, and now we’re at 2 percent. Doing more of today’s ag is not going to build carbon – we need to do something differently, such as all these synergistic, complementary activities to enable that to happen.”

As to why more farmers aren’t doing these things, Ingram says there are a multitude of reasons: “There are logical reasons why. Time and effort [for one] – the average operation around here is probably a father and a couple of sons, who have been doing what they know for 30 or 40 years, and doing alright with that.”

There’s also an inherent barrier put up by the standard agronomy model in Australia, whereby an agronomist advising a farmer is paid for the inputs they provide, rather than the agronomic advice itself. Therefore there is no real incentive for an agronomist to advise a farmer to reduce the amount of nitrogenous fertilizer they use, for example.

Role of biotech

After reducing emissions where possible, the next step is to pursue the second of the three main interventions: deploying biotechnology to improve sequestration.

This naturally overlaps with the aim of agronomic interventions as increasing soil carbon sequestration should make healthier soils that have higher yields – and the agronomic interventions in turn also foster an increase in soil carbon, especially through tactics such as minimal soil disturbance and cover cropping.

Kilter Rural has been working with Loam Bio for the past three years on this front. Loam Bio is a biotech start-up founded in 2019 that uses microbes to sequester carbon in soil through a microbial seed coating developed in-house.

The firm has attracted significant investment from the private sector already, with the likes of the Clean Energy Finance Corporation and Grok Ventures backing its A$105 million Series B funding round, co-led by Lowercarbon Capital and Wollemi Capital, earlier in 2023.

Loam Bio co-founder Tegan Nock accompanied us to the Kilter properties to tell us more about how the firm’s technology is helping the asset manager achieve its goals, and agreed with Gunn’s statement that there is no “silver bullet” to more sustainable agriculture – but there is “silver buckshot.”

She says: “Agriculture is recognizing that we need new technologies and all the best science that we can bring together to push ourselves forward.”

Loam Bio’s technology enables some of the carbon that plants draw down from the atmosphere in the form of carbon dioxide to be fixed into the soil – thereby allowing them to sequester net carbon. Nock says that when the firm’s products are added into a business-as-usual farming system, Loam Bio is seeing an average 5 percent increase in soil carbon sequestration throughout a typical growing season.

Nock adds that one tonne of soil organic carbon translates to 3.67 tonnes of atmospheric carbon removed from the atmosphere – and that Loam’s method allows it to be stored in much more stable forms, via mineral-associated organic matter.

Crucially, she says, this type of soil organic carbon has a far lower chance of being lost back to the atmosphere and a large percentage of it will remain in place even in the event of, say, a major drought or if a previously no-tilled field was ploughed through.

“This gives robustness in terms of what we’re producing as well as confidence, whether that is to supply chains, markets, or the farmers themselves about how they are managing carbon to ensure it is actually in the right places,” she says.

Gunn says this gives Kilter Rural a robust measurement system for sequestering carbon that fits into existing methodologies prescribed by the Australian government, adding that Loam Bio’s technology “has proven to be pretty spectacular in actual application.”

This could provide an additional revenue stream through the generation of Australian Carbon Credit Units – or it could provide Kilter Rural with a carbon silo for the future.

“You might hold on to some of those credits to help you cover whatever gets imposed on you by somebody else [in future],” Gunn says, adding that he is sure that, whatever happens, this fund will have an accounting line for carbon in it and that the firm expects the operation to become carbon-positive over time.

Biodiversity through revegetation

The third plank of the strategy centers around biodiversity, mainly through revegetation.

“We’ve always tackled revegetation through a biodiversity lens, aiming to increase biodiversity in the landscape both terrestrially and aquatically where we can,” Gunn says.

“The farmers [of these assets] have done a bloody good job – but there is still real scope to optimize and create further connectivity.”

Gunn points out wooded areas of the assets that could see more diversity of species introduced as an early win, but the biggest difference the firm is set to make is in revegetating areas to create a connected biodiversity corridor. This is especially important given that the assets border the Murray Valley National Park to the south, with Kilter intending to manage its assets in a complementary way.

The fund is targeting 30 percent native vegetation coverage by 2030, in line with the UN COP15 Biodiversity Framework.

“I’m absolutely certain, although I don’t know to what level, that we will be able to sell biodiversity credits associated with this site,” Gunn says.

This means the asset is likely to have a significant “carbon-plus” component, as Gunn puts it, that includes biodiverse areas that sequester carbon too, as opposed to a monoculture of forestry planting that solely does the latter.

“That sort of connectivity makes a big difference in rural landscapes when you talk about the movement of species. There are 60-odd threatened species listed in this region so it’s a really important area biologically. There’s a real opportunity for us to add value to the landscapes, and that’s how we approach it.”

The waterways that run through the footprint of the site also provide an opportunity, as Gunn says it is possible the Australian government will increasingly use these for the delivery of environmental water, given how challenging it is to move water through the Murray-Darling Basin system through other routes. This could have a bonus effect on the landscapes that Kilter manages here.

In the end, of course, the Kilter Agriculture Fund must perform for its investors if it is to be successful – the fund has an ultimate target of A$500 million. But Gunn and his team at Kilter Rural have this front of mind and repeatedly remind us that everything they do will ensure the farms perform optimally from a financial perspective as well as an environmental one – and that they hope the wider sector will begin to follow suit, should they be proved right.

He sums up: “We want to deliver returns, absolutely – that’s our primary objective.

“But we want this to be an educational piece that other croppers and mixed farmers can learn from, so that we can transform the agricultural system.”

Daniel Kemp travelled to Tocumwal as a guest of Kilter Rural