The Most Important Outcome of Regenerative Agriculture: Profitability
Regen can dramatically improve on-farm economics thru 1) net profit increase, 2) land value appreciation and 3) ecosystem asset sales.
Regenerative agriculture is usually discussed through an agronomic or environmental lens, either how it’s implemented on-farm, or the positive ecological outcomes that result.
And to be sure, it generates striking outcomes across many dimensions that are vital to humanity’s future: it increases yield and consistency of production, captures carbon, improves water-infiltration and water-holding capacity, increases resilience to extreme drought and floods, reduces erosion and chemical runoff and moderates temperatures.
But those aren’t the most important outcomes of regen. The most important outcome: it's more profitable.
The on-farm economics of regen illuminate a path for growers to self-finance transition and can underpin new economic models for investors to profitably underwrite transition.
In prior articles I shared some core takeaways from my travels thus far in regenerative agriculture:
However, capital is not broadly available from traditional sources (in particular consumer product premiums, investors or lenders)
However, capital is available from an unexpected source: on-farm economics post-transition.
Greater profitability shouldn’t be a huge surprise: as the system leverages the natural resources available in the soil, it functions not just more efficiently, but abundantly. Fewer external inputs are necessary and it opens avenues for additional revenue streams.
Specifically, regen drives positive economics on-farm in three broad areas: net profit increase, land value appreciation and ecosystem asset sales.
Let’s look briefly at each:
Net Profit Increase: According to a May, 2023 study by BCG and OP2B, regen drives 70%-120% higher profits on-farm, due to reduced chemical use, increased productivity and additional cost savings such as reduction in fuel use. It also serves as the foundation for multiple revenue streams on-farm. Many other studies support increased profitability post-transition, and based on the track record of the most successful producers, most of these studies may be underestimating the impact.
Land Value Appreciation: It's highly likely that regen will increase land value as supply chain, investors and land buyers valuing reduced risk, increased resiliency and productivity. Resilience scoring is a natural within value chains as wholesale buyers work to increase the preparedness of their supply sheds for extreme climate events. And we’re seeing early risk scoring in lending and insurance, which will eventually influence rates. Combining the production benefits of healthy soil (more consistent production and higher yield), it's natural that these factors in combination will lead to increased value for the underlying asset. There's precedent for similar scoring mechanisms impacting land value (e.g. the Iowa Corn Suitability Rating, CSR2).
Ecosystem Asset Sales: There are new markets coming online for the “ecosystem services” generated on-farm. The most well known is the voluntary carbon market, where credits are bought and sold for reductions or removals of carbon and other greenhouse gasses such as Methane and Nitrous Oxide. Historically these have been sold to “offset” company emissions, but a more powerful approach is emerging in food & fiber: “insets” where companies pay their suppliers for their carbon reductions and sequestration. Additionally, there are early biodiversity markets, as well as local water authorities’ payments for positive watershed outcomes such as reduced nutrient runoff and increased water holding capacity.
To be sure, none of this is easy. There’s tremendous effort and work – and risk – growers take on. For many if not most, it’s not all up-and-to-the-right.
In aggregate, however, the magnitude of this economic upside is extraordinary. Across the 900 million acres of farm and ranchland in the U.S. the combined upside of these factors eclipses $1 Trillion over the next ten years.
These economics have the potential to move the system because they motivate the two most important parties: growers and capital allocators.
For growers, they appeal to their dual identities as both business owners and stewards. And for capital allocators (a different type of steward), they can provide the basis for novel financial structures.
And together, it means that risk can be shared more equitably. Currently, farmers shoulder 99.9% of the risk of shifting their operations. Greater profitability can underpin structures where risk is shared across the system and capital allocators are encouraged to provide budget and resources to ensure successful transition.
This analysis raises many questions:
Profitability studies?? What factors have been considered or not? What regions and cropping systems?
$1 Trillion - really?? Where does that number come from? How achievable is that? What’s the maturity of each of these categories of upside?
How hard is this for growers?? What are the practical barriers to making this work?
Ag soil carbon credits?? How accepted among buyers are those? How do you deal with the additionality and permanence requirements of the current carbon markets?
Novel financing structures?? Assuming these economics are true, how can they be applied to transition finance vehicles and real asset investing?
I can dig into these and other factors in follow-up posts.
Which are you most interested in?