February 19, 2024

New white paper from SLM Partners synthesizes the latest research and draws from their investment experience

By Paul McMahon,  Founder and Managing Partner, SLM Partners

Regenerative agriculture is a hot topic right now. It is being embraced by policymakers, agribusinesses, asset managers and investors as the future of food and a great opportunity for investment. But the topic is best by both hype and greenwashing. New entrants, often with limited farming experience, can exaggerate the potential of regenerative agriculture, promising investors an easy climate solution, venture-type returns, and the ability to deploy billions of dollars of capital. Some groups are claiming they are regenerative even though they are doing the same things as before (business as usual). Investors are understandably confused. So, just what is the real potential of regenerative agriculture? 

In 2016 we published a white paper that set out to answer this question. Our goal was to provide a primer for those coming to the theme for the first time, and it has been a pleasant surprise to see it used in this way. It is time for an update – a lot has happened since then. There has been an explosion of research on regenerative agriculture. Encouragingly, the type of research has also shifted from ‘grey’ literature – farmer case studies, NGO reports, educational videos – to peer-reviewed academic studies. In addition, we at SLM Partners have learned a lot from our experience investing in regenerative agriculture across three continents over the past decade. We have just published an updated white paper that synthesises the latest research and shares the lessons we have learned. 

Part of the confusion around regenerative agriculture is there is no single definition of what it is. We adopt a broad definition of regenerative agriculture: the growing of nutritious food and other products in a way that enhances soil health, climate stability, and ecosystem functionality, while being economically sustainable for the farmer. To understand regenerative agriculture, it is helpful to differentiate between underlying principles, farming practices, agricultural systems and outcomes. Ultimately, we know regenerative agriculture by its outcomes – its environmental, social, and economic impacts. The practices and systems that farmers use will vary depending on local context, although they are underpinned by common principles that focus on soil health and emphasise biology over chemical inputs.

There is a growing body of research that points to the positive social and environmental outcomes associated with regenerative agriculture. These are centred around five themes: improving soil health; addressing climate change; enhancing biodiversity; improving water quality; and growing higher quality, nutritious food. Regenerative agriculture can address many of the negative social and environmental impacts associated with our food systems, while restoring the productive capacity of ecosystems and growing better food.

To give one example, researchers led by a professor from the University of Washington compared 10 regenerative farms with neighbouring conventional farms across the U.S. They found that soil organic matter was on average 80 percent higher on the regenerative farms. Soil organic matter is a great proxy for soil health, but it also translates directly into more carbon storage, better water cycling, and higher crop yields. The regenerative farms also scored 3x better on the Haney soil test, which measures soil microbial activity and nutrient availability. 

Yet, this was only part of the story. The researchers also analysed the nutrient density of the food grown on these farms. They found that crops grown on the regenerative farms had higher levels of certain vitamins, minerals, and phytochemicals relevant to human health, while beef and pork from animals raised on the regenerative farms had a healthier fatty acid profile.(1) We are starting to understand the linkages between healthy soils, healthy plants, and healthy people. 

The other important outcome of regenerative agriculture is economic. Regenerative agriculture grew out of dissatisfaction with a conventional model that squeezes farmers between high input costs and volatile commodity prices, neither of which they can control. Average farm incomes in most parts of the world are low. The average age of farmers keeps rising, as younger people stay away from the sector. A goal of regenerative agriculture is to return more economic power to the farmer. 

Our research indicates that regenerative agriculture can be more profitable and deliver superior risk-adjusted financial returns to farmers and investors – we call this the “Regenerative Edge”. These superior returns will come from one or more levers: higher yields, lower operating costs, higher output prices, new environmental payments (such as carbon), or more stable operating results (i.e. resilience). A number of recent published studies have assessed the overall profitability of regenerative agriculture at the farm level, with positive results.

Investors can support the transition to regenerative agriculture by investing along the food value chain. They can have the most direct impact by investing in farmland as part of a real asset strategy. Investor allocations to farmland are increasing because of strong historical performance, lack of correlation with other asset classes, and resilience to financial market downturns and inflation. But investing in farmland that is managed regeneratively has added benefits and can provide a higher return for investors (Alpha). In the right context, our experience indicates that it can add 1-3 percent to an annualised internal rate of return.

Nonetheless, there are challenges to investing in regenerative farmland: a scarcity of regenerative farmers, scale limitations, highly priced land assets in many parts of the world, and tough farming economics. Successful strategies require a realistic attitude to rates of return and scale, rigorous analysis of market dynamics, and careful selection of farmer partners – the scarcest commodity of all.

If these pieces are in place, we believe that regenerative agriculture can be a compelling investment opportunity. We hope that investors can navigate between the Scylla and Charybdis of hype and greenwashing that surrounds this topic. If they can avoid these perils, and get to the other side, their capital can play an important role in accelerating the transition to a regenerative future.

1. D.R. Montgomery et al, ‘Soil health and nutrient density: preliminary comparison of regenerative and conventional farming’, PeerJ, 10:e12848 (2022)

ABOUT THE AUTHOR

Paul McMahon is the founder and Managing Partner of SLM Partners, an asset manager with more than half a billion dollars in AUM that has been investing in regenerative agriculture in the USA, Australia and Europe for more than a decade. You can download their new white paper – Investing in Regenerative Agriculture: Reflections From a Decade of Experience – from the SLM Partners website here.

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