Proving the link between natural capital and farm profits

As we near the end of December, it is customary to reflect on some of the things that have shaped the year gone by.

One of the most prominent trends in agriculture investment has been a continuing focus on natural capital and all that it entails.

The concept is still quite loosely defined and can encompass a range of metrics, including soil carbon, water management, vegetation coverage, among myriad other elements.

In answer to many of the questions that people have about whether a focus on these things is worthwhile or not from a financial perspective, a new research project has been launched in Australia that aims to quantify the link between natural capital and farm profitability.

PwC is working with the National Farmers Federation and the Macdoch Foundation on the project, which is titled Farming for the Future. The program will work with an initial 150 farms, scaling up to 1,500 farms within a few years, to build a benchmarking platform for natural capital metrics, providing data about how this affects profitability.

“The project aims to build capability and understanding among farmers to run sustainable, profitable farming businesses in a changing world, [where] climate change is making our conditions more challenging. There are lots of pressures coming downstream from the supply chain and export markets to be more transparent in our environmental impacts, and we don’t necessarily always have the capability to provide that transparency,” Macdoch Foundation CEO Michelle Gortan told Agri Investor this week.

“The ecosystem around farmers like banks, financial institutions and investors all have a role to play in this. As a community, we need a resilient food and fiber supply chain, we need our landscapes to be healthy – this is our way of mobilizing the entire system for these changes. We think natural capital is the framework to do that,” she added.

The project will be ongoing and iterative, with plans to release regular updates throughout the program rather than relying on one big bang of a report at the end, which should begin to highlight the positive effects a focus on natural capital can bring.

And it aims to break the concept of natural capital down into its constituent parts to allow farmers and asset owners to ensure they are getting the most bang for their buck.

“Whenever we talk about natural capital, people think it is just soil carbon – but we are talking about all of it. We want to understand what all productive elements of natural capital can contribute. It is soil carbon, but also water, riparian areas, pastureland, tree cover, animals – all of those things,” Gortan said.

“The benchmarking platform will let us work out which elements make the biggest contributions in particular regions or to particular types of farm enterprises. It will let farmers know which elements are most important for their business to focus on.”

One of the common refrains among investors reluctant to commit capital to agriculture is that there is not enough track record data available for them to make an informed decision. While that concern has improved in recent years, projects like this could go a long way to ensuring that newer concepts within the ag investing universe, like natural capital, will not remain woolly for long.

The Farming for the Future team is keen to speak to institutional investors about the work they are doing on Australian farms, so reach out for more information and get involved.