By Matthew Kruse, CEO of Genesis Investimentos
The interest in decarbonizing our society is surging in popularity as investors and advocates look for ways to reverse the impact of climate change. This trend is being propelled forward by Wall Street investors who have seen the success of companies like Tesla and Impossible Foods. One research firm estimates that last year, investors dumped $500 billion into “energy transition” investments encompassing everything from transportation to agriculture. Companies like Microsoft, Amazon, and Apple are vowing to remove any and all greenhouse emissions generated by their respective companies in the not-too-distant future. Even oil and gas companies, long despised by environmentalists, are being forced either by shareholders or public pressure to showcase some sort of plan to reduce their carbon footprint.
The ultimate goal here is to become more sustainable. Of course, how we become sustainable, and who determines that, is not yet clear. Unlike accounting with its universal standards, there are no generally accepted sustainability practices. Furthermore, those that have been early adopters of sustainability practices have done so at their own peril. Cover crops for example, while growing in popularity, are still experimental in a large part of the Corn Belt.
Being sustainable may not even be enough anymore. The new buzzword is “regenerative”. Regenerative agriculture is a diverse approach utilizing various sustainable conservation practices that seek to rebuild soil health. It seeks to rebuild topsoil and organic matter through some combination of minimal tillage, cover crops, organic fertilizer, crop rotation, and several other practices. While many farmers have already been utilizing these practices, widespread adoption will be limited as there is not always an immediate and discernible payback for this.
Farm managers and land appraisers are being asked by conservation groups and investors to provide information on how soil health improvement programs can increase the value of land. The answer so far is that there is none. There is no sales data available to determine if there is or is not a change in value directly related to regenerative practices. Even in regions like Southeast Iowa where adoption of cover crops has been well received, there is no distinction in market value. Land values are still based on cost, income, and sales. The more a farm makes, the higher it should bring at auction. The point here is that while farmers are open to more conservation practices, the speed at which they incorporate these practices are largely dependent upon their bottom line. If these practices cost them money, even in the short term, they will be slow to adopt them.
One of the biggest challenges is proving to carbon credit buyers that the money they are paying is going towards an activity that otherwise would not take place without their financial reward. Carbon buyers want to incentivize farmers to adopt regenerative farming practices, so there will be some resistance to paying those farmers that are already using them. One such company called Nori, requires that farmers prove that they have never used a regenerative farming practice. The risk is that those already doing no-till for example, will be incentivized to till their soils so they can be considered non-compliant. Once done, they can then return to their previous no-till system, collecting carbon credit payments.
Corteva also has their own carbon credit program that pays out according to 1) tillage reduction, 2) cover crop adoption and 3) nitrogen efficiency. Its payout value is also affected by soil type and location. Corteva is well aware that their monetary payments would not cover all of the cost of adopting regenerative practices. Their payment range varies from as low as $6/acre to up to $30/acre, but my impression is that most payments will be below $10 per acre. Cover crops can cost as much as $35 – and that is based on last year’s prices. A $6/acre payment would barely cover just the application.
In Corteva’s case, they have made it clear that they are not trying to convince everyone to convert to regenerative farming. They also seemed to be aware that this process was not meant to be fair to everyone. Their goal was to identify and partner with those select farmers who were already thinking about converting to regenerative farming practices but had not yet done so. While farmers may balk at this and adopt these practices without them, they would eventually be excluded from joining later on as it would be considered an established practice.
A rival carbon credit company run by CIBO says farmers can earn credits for regenerative practices even if they have been employing them for many years. CIBO tracks regional practices and compares one farm to the overall average. If you are adopting cover crops in a region that does not utilize cover crops, your “credit” will be higher than if you were in a region that already widely adopts cover crops.
For more information on specific carbon programs, ISU has done a good job of comparing different programs at the link here: https://www.extension.iastate.edu/agdm/crops/pdf/a1-76.pdf
Matthew Kruse is CEO of Genesis Investimentos, a boutique farmland advisor with holdings in Iowa and Brazil. He can be reached at matthew@investgenesis.com.
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