This article is sponsored by Vayda
Institutional farmland investors, with a few exceptions, have been interested bystanders to one of the most consequential changes occurring in the agriculture industry. In recent years, food and agriculture actors, particularly large food companies and grocery chains, have committed billions of dollars to regenerative agriculture programs in pursuit of supply-chain decarbonization.
Action on soil carbon can be daunting, especially given the nascent science on sequestration and storage, as well as uncertainty around voluntary carbon markets and pricing. Still, taking the reins on soil carbon is not only within reach, but can prove extremely accretive to farmland investments and drive superior risk-adjusted returns across portfolios.
Appetite from the food and agriculture industry has been driven by three main factors. First, there is the need for supply-chain resilience. Food production is highly vulnerable to the effects of climate change. Severe rain and drought, extreme temperatures and diminishing access to water for irrigation all pose tremendous risk to food production levels and yield stability. The recent covid pandemic serves as a clear reminder of the havoc that supply-chain disruptions can wreak on the food industry. The current climate crisis poses even greater long-term risk if not properly managed.
Decarbonization initiatives and science-based targets are a second factor. Nearly every major food company has established decarbonization targets in response to the climate crisis as well as consumer and investor pressures. Hitting these goals will require major reductions in Scope 3 emissions. The carbon intensity of conventional agricultural practices means that often the majority of these firms’ Scope 3 emissions come from the farm.
Climate-related disclosure rules is the third issue. An acronym soup of corporate climate-related disclosure frameworks is finally being adopted in various forms by federal regulators around the world, forcing many food and agribusiness companies to take greenhouse gas (GHG) accounting more seriously.
As these rules come online, the resulting data will provide fodder for fund disclosure and labeling rules like the Sustainable Finance Disclosure Regulation (SFDR) in Europe. Together, this will begin to tie corporate climate outcomes to capital markets in ways that will surely reward successful sustainability efforts while punishing firms who have failed to set or execute emissions targets.
The rise of ‘carbon farming’
In their pursuit of decarbonization, food and agriculture firms have had to seek out transition finance mechanisms that allow them to invest in stimulating adoption across their supply chains. Thus far, a preferred tool has been “insetting” initiatives that pair partners within the supply chain to reduce and remove emissions. This is particularly true with commodity crops in voluntary markets like the US.
These “carbon farming” programs have taken various shapes. But what they share is a funding partner or partners (often food companies or grocers) who contribute capital in exchange for the verifiable GHG reductions and removals resulting from co-ordinated activities taking place across their supply chains. In commodity crops with longer and more fragmented supply chains, a grain aggregator, co-operative, or other project developer generally sits at the center of the program, enrolling and educating farmers and managing program compliance and payments. Credible non-profits will often consult on the program, and a third-party technology party is selected to provide remote monitoring and verification support. These technologies generally use satellite imagery to estimate emissions reductions and removals based on widely researched models.
The benefit of these programs is that they allow food and agriculture companies to realize immediate and tangible returns on their decarbonization investments (ie, “credits” against their Scope 3 emissions), while also stimulating longer-term adoption trends that can drive down emissions free of charge over time.
These carbon-focused efforts are commendable, and the concepts appear sound on the surface. However, they increasingly appear to be floundering – either not delivering results or scaling to the size required to have a material impact on global agriculture emissions. But why not?
One answer is poor measurement and estimation of emissions reductions and removals. The scalability of these programs is largely achieved through lighter-weight monitoring and verification practices, such as grower self-report surveys and remote sensing (ie, satellite-based) technologies.
The simple and sometimes binary inputs are transformed into estimates of emissions reductions and removals through well-established models, but often at risk of “garbage in, garbage out.” They also have a natural bias for soil carbon and sequestration, which can be more directly observed and modeled from afar. Emission reductions from changes in operations may be harder to track, even though they can be a critical source of improvements.
Poor incentive levels and structure is another issue. As a result of the previous point, insetting programs writ large are structured around highly conservative assumptions of the GHG impact of regenerative practice change.
Poor estimates support only very low levels of payments, which are already constrained by the need to deliver Scope 3 GHG reductions at a lower price per tonne than the more heavily supervised carbon offset market. $10-$35 per acre per year simply does not compensate for the risk growers take to undergo these transitions.
Just as importantly, the general focus on supply sheds versus individual farms, plus paying per acre per year for practice changes versus actual outcomes, provides no incentive for continuous improvement on any given farm. Individual performance is not rewarded with larger payments, and the resulting incentive is to do the bare minimum needed to qualify for payments.
It is perhaps no surprise, then, that insetting programs are seeing very high levels of awareness and very low levels of adoption in places like the US. Many participating growers show low commitment to practice change and achieve sub-optimal environmental outcomes. The risk of reversals is high, putting greater downward pressure on the price of soil carbon. All of this puts these very programs and the related food and agriculture industry investments at risk.
Driving sustainable and profitable change
Stakeholder demands and emerging ESG and climate-related disclosure rules are creating similar pressure for agri-investors to decarbonize and enhance the sustainability of their investments. Instead of standing watch as potentially self-defeating market dynamics play out and threaten the opportunity that regenerative transitions present, there are three things that agri-investors can do to take the reins on soil carbon, ensure that farmers and landowners are duly rewarded for their environmental impact and put the industry on a better path.
“We suggest that farmland investors focus on sustainably achieving a net-neutral and ultimately net-negative emissions inventory on their assets”
The first is to re-think regenerative agriculture transitions as an investment in core farm profitability. Regenerative agriculture is fundamentally about using alternative, nature-based management practices to effectively manage soil fertility and water, as well as to protect crops, with far fewer inputs. While change is highly complex to manage, the end result is a much more profitable, climate-resilient and valuable farm.
Commodity grain farms in the US, for example, could experience net-profit margin improvements of over 300 percent through effective regenerative implementation. By investing in transitions, landowners are positioned to capture some of this value to drive both current yields and equity appreciation.
Regenerative transitions are widely believed to negatively impact farm yields and profits for several years while soil health is rebuilt. More than a hard truth, this dynamic tends to be caused by poorly designed or unsupported transitions.
Regenerative conversions can be materially de-risked with expert agronomic support, to ensure yields are maintained while profits are enhanced throughout the transition period, starting at year one. An investment in regenerative transition that emphasizes farm profitability and agronomic support can drive superior IRR without any requirement for carbon payments or market premiums. This is where agri-investors should direct their efforts.
While the focus of transition projects should be farm-level profitability, environmental impact is still a critical aspect. Well-structured measurement of environmental and climate outcomes must be performed from the start. For GHGs, the emphasis must be on full-farm net emissions, as opposed to just soil carbon sequestration, aligned to market-leading measurement protocols. With third-party support, landowners are in a unique position to gather ground truth data on management practices and applications, as well as soil organic carbon changes over time. The full-farm view allows a much more precise estimate of net farm emissions with real future monetization potential.
We suggest that farmland investors focus on sustainably achieving a net-neutral and ultimately net-negative emissions inventory on their assets. In the highly dynamic world of carbon markets and supply chain decarbonization programs, monetization opportunities are not fixed but are constantly evolving.
The shift to sustainable sourcing
Opportunities are constantly evolving on all aspects of soil carbon.
GHG reductions and removals on the farm can be monetized through insetting programs or, better yet, carbon offset projects that allow for better pricing and a wider range of prospective buyers. For biofuel feedstock in the US, tax credits are expected to come online in 2025 and will allow agriculture producers with low carbon intensity scores to be paid higher prices for their production.
We also anticipate that, over time, we will see a shift with food and agribusiness companies, from carbon insetting and claims of “reducing Scope 3 emissions on the farm” to sustainable sourcing efforts focused on procuring ingredients from carbon negative producers, at some premium.