Æ : Action Ecology

The investment case for ecological farming

I was recently sent this paper by Paul at SLM partners, which I was pleased to discover does a really good job of making the economic case for regenerative / sustainable farming practices.

With all the great talk about sustainability flying around these days, alongside exciting efforts by producers to improve their techniques and management strategies to reduce waste and environmental impact, many of us involved in this field can easily risk finding ourselves engrossed in the details and therefore distanced from the perspective that other important players outside of it may have (such as institutional investors). Often people who's main focus is financial instruments and investing have little to no experience with the relative merits of different land use approaches etc and no easy way to make an informed cost/benefit analysis of one over another. This paper however does a good job of laying out why ecological and regenerative farming systems provide an attractive investment opportunity.

For many of us with our heads in the trees, grass or soil, putting regenerative agriculture into terms that are understood easily by investors doesn't always come naturally or seem (to some) like an pressing priority, however it is undeniably becoming only more and more urgent that (as the current crises surrounding global resource use particularly in agriculture continues, with all the risks, both ecological and financial that come with that) we see a need for smart investors and innovative land managers to parter up.

With investors looking to put capital to smart uses, and innovators in land uses looking to demonstrate regenerative agriculture at scale the time is right to bring the two together and discuss how each can help the other deliver both financial and ecological return on investment.

Extract of first page

Summary


This paper explains why ecological and regenerative farming systems provide an attractive investment opportunity. It is intended for institutional investors, family offices and investment managers with an interest in real assets and/or impact investing.

Farmland investing today


Farmland has emerged as a new asset class for investors over the past decade because of higher food prices. Historical returns have been good. However, commodity prices have dropped and farmland values are plateauing in many regions. In addition, most investment has gone into high- input, industrialised farming systems that are exposed to hidden risks. In future, investors will need to be smarter and more environmentally- aware to capture the opportunities.

The risks of industrial agriculture


The profitability and sustainability of industrial agriculture are exposed to five major risks, which are set to intensify in coming decades:
1. Exposure to high and volatile input costs
2. Degrading natural assets such as soils and water reserves
3. Vulnerability to a changing climate, especially extreme weather events
4. Negativeenvironmentalexternalitiesthatwill be increasingly taxed or regulated
5. Shifting consumer trends, as people demand clean, green, healthy and tasty food

Ecological farming: an attractive alternative


There is an alternative way to manage land that can minimise these risks, while increasing profitability. Ecological farming seeks to build soil health, minimise external inputs, recycle nutrients and energy, embrace diversity of crops and animals, and produce high value food and commodities. It is not necessarily organic (although it often can be), it can be practised on a commercial scale, and it is firmly science-based.
We have identified a number of proven systems that have investment merit. They include:

  • Holistic planned grazing for cattle and sheep
  • No-till cropping with diverse cover crops
  • Agroforestry systems
  • Low input pasture-based dairy
  • Certified organic farming in certain countries

Seven reasons to go ecological


There are a number of reasons why these types of systems can deliver superior risk-adjusted returns:
1. Comparable or better yields in most cases
2. Lower operating costs because of less reliance on external inputs
3. Enhanced natural capital, with the opportunity to increase asset values by regenerating degraded land
4. Climatic resilience because healthy soils cope better with droughts and floods
5. Positive environmental externalities and the chance to be paid for them, for example through carbon credits
6. The ability to sell to higher value markets such as organic or grass-fed
7. Higher profitability with less volatility

The recent Paris Agreement has refocused attention on climate change and the need to control greenhouse gas emissions. Ecological farming can play a role by absorbing carbon from the atmosphere and storing it in the soil.

Investing in ecological farming


Farmland-ownership strategies provide the most direct exposure to this theme, as they allow investors to benefit from the uplift in value caused by the regeneration of land. But ecological farming is knowledge-intensive. Investors will need to back skilled operating teams, or invest in partnerships with carefully-selected farmers on a profit-sharing basis.

In terms of geography, the best opportunities lie in developed countries where land prices are not distorted by factors external to agriculture.
We believe that ecological farming systems can deliver superior risk-adjusted returns, while generating positive environmental impacts. There are proven systems out there – the opportunity lies in scaling them up.


To continue reading, please view/download the full report HERE


Credit: Author Paul McMahon, SLM Partners. ©SLM Partners

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