Regenerative agriculture: the investor perspective

Renee Cheung, an independent consultant, explains how to choose a suitable regenerative agriculture asset.

As terms such as sustainability, regenerative agriculture and agroecology are increasingly heard in the agri investment community, the investment process and analysis needed must be understood, according to Renee Cheung, an independent consultant advising asset managers and private companies.

Investing in regenerative agriculture is about achieving long-term sustainability, for the land and for investors.

Regenerative agriculture investors are not merely seeking farming opportunities that cause no ecological harm. They are targeting farming methods that can enhance the soil, restore previously degraded land and reverse biodiversity loss by trying to work with, rather than outsmart, nature.

These investors look for agricultural production models that are low-input and require no chemical use. Cattle production systems that are 100 percent grass-based, organic polyculture crop systems, and mixed farms that combine organic crops and livestock are examples that come to mind.

The goal is to enable the land to be more productive and resilient against environmental pressures such as climate change and diseases without depending on costly chemicals and volatile commodity prices (in the case of the feedlot model). This, in turn, leads to enhanced stability and profitability of the investment.

Many investors in regenerative agricultural enterprises target returns that, after adjusting for risks, are on par, if not higher, than those generated by non-regenerative opportunities. Their investment criteria are no less stringent. In fact, identifying attractive investments in regenerative agriculture is more difficult and requires more creativity than the usual agriculture investment for the following reasons.

Scale: many regenerative agricultural operations have been practised on a small scale. For example, farmers in the Amazon and Andean regions of South America, often with less than 5 hectares of land, have used agroforestry and mixed cropping systems for generations. While these opportunities could prove interesting to the individual impact investor who is happy to invest less than $1 million, they are more challenging for institutional investors. Larger investors, many of whom intend to deploy $50 million or more each time, would look for investment opportunities that can replicate a small system on a large scale.

Operating team: there are few producers who have a combined track record of managing third-party capital and implementing regenerative agriculture systems on a large scale. Even for investors who want to work with multiple small farmers to apply regenerative agricultural methods on their own land, someone with experience in training and managing a large team of people is required to manage the overall business. Finding an investible operating team that has the experience and local knowledge is often one of the biggest hurdles.

Finding undervalued land: regenerative agriculture is about reaping profits by “turning around” degraded land. The challenge – and the opportunity – lies in identifying land that others perceive as unproductive or low quality, such as land with insufficient water to support conventional agriculture, and unlocking the value of that land using regenerative methods.

Investment horizon: most promoters involved with regenerative agriculture have a genuine interest in seeing the land being managed ecologically over the long-term. They appreciate that a majority of the return is to come from yield, which should continue to improve as the land becomes more fertile. Liquidating the investment once the land has reached a certain level of productivity or when land prices are high is usually not their primary goal. Investing through a standard fixed-term vehicle, whereby there is a forced exit in, say, 10 years, almost seems inconsistent with what promoters are trying to achieve. Creativity is required to design investment structures that strike a balance between providing liquidity for investors after a certain number of years and allowing sufficient time to implement the regeneration strategy.

Compared to the number of standard agriculture investment products that exist, there are very few regenerative agriculture opportunities from which investors can choose, particularly those that generate a competitive return. However, this opens up an opportunity for farmers and finance professionals who believe in regenerative agriculture to work together and create innovative investment products to generate long-term financial and environmental good.

Over the past few years, there are already a handful of pioneers who have launched investment offerings in this area, such as SLM Partners in the UK and Grasslands LLC and Farmland LP in USA, and they have been rewarded with relative success in fundraising.

While we can expect to see more opportunities in regenerative agriculture in the future, a more proven model needs to be established for mainstream institutional investors to become interested. Nevertheless, it would be unwise for any traditional agricultural investor to dismiss the concept of regenerative agriculture without first seeing some of these farms that have secured investments from institutional investors. Some are already demonstrating early signs of success in land regeneration. If their investment thesis is correct, these ventures should also translate into financial success.

Renee Cheung is an independent consultant advising private companies and asset managers on agriculture-related investment opportunities. Her focuses include sustainable and regenerative agriculture and Latin America. She can be reached at renee@cs.stanford.edu