Barriers to adopting regenerative agriculture: Farmers’ financial risk of transitioning and how to mitigate it

By Andre Ticoulat

Intro

Here at TransCap Initiative, we believe that unlocking the potential for regenerative practices necessitates a strategic portfolio of interventions aimed at facilitating systemic transformations. Addressing key barriers that impede the prompt and widespread adoption of these practices is crucial to spur further ripple effects throughout the system (a.k.a leverage points). These effects contribute to creating positive dynamics for the transformation of the systems at play.

One of several pivotal leverage points identified through our systems diagnosis is that farmers typically face a dip in profits in the initial years of transition. Since many farmers do not have the resources or incentives to foot the bill, this becomes a key impediment to adopting regenerative practices.

In this article, we will focus on this dip in profits, while future discussions will delve into various other leverage points and interventions to foster the broader adoption of regenerative practices.

Understanding the risk

A farm is similar to other businesses; its profit derives from the function revenue minus costs. In the initial phase of the transition, farmers might experience a revenue decrease and cost increase, resulting in lower profits. The reduced profit poses a blocker to the transition and requires an intervention to overcome this challenge. There are two main reasons for reduced profit:

Yield Reduction

Farmers often experience a temporary decrease in yields during the first years of the transition. Transitioning from conventional to regenerative agricultural practices involves, amongst other interventions, a shift away from synthetic fertilisers. This change may result in a reduction in crop yields as the soil, adjusting to a more natural state, may take time to rebuild its microbial diversity and nutrient content.

Higher Costs

Furthermore, some farmers may encounter increased working capital requirements during the initial years of the transition. This shift involves a strategic upfront investment in nature-based solutions, including cover crops, rotational grazing, biofertilisers and diversified plantings. Regenerative farming typically requires more labour, increasing the cost of production.

Having said that, it is crucial to acknowledge this dip as a strategic investment in the long-term health of the land, which, once rehabilitated, will yield more resilient and sustainable outcomes. As research from Bain and Company has established, it generally takes four years for profits to recover, from which point they exceed previous levels.

(Source: Bain & Company)

Long-term benefits

Regenerative farming holds the potential for long-term benefits and reduced operational costs that outweigh the initial transition cost.

Positive feedback loops

As regenerative practices take root, a cascade of natural cycles comes into play, yielding positive reinforcing benefits. The revitalised soil structure enhances water retention and diminishes erosion while fostering superior nutrient absorption. This synergy results in heightened crop yields and an overall fortification against environmental stressors, ultimately mitigating revenue risks over time.

Furthermore, improved soil health contributes to an enhanced resilience of crops against pests and diseases, offering an additional layer of risk mitigation and potentially reducing the necessity for external interventions. Agricultural pests often thrive in ecosystems with low biodiversity, and research indicates that cornfields characterised by greater insect diversity, robust biological networks, and balanced communities exhibit lower pest abundance.

The study conducted by Claire Canne and Jonathan Lundgren corroborates this by revealing that regenerative cornfields, left untreated with insecticides, exhibited lower pest abundance compared to their treated counterparts — see below:

Figure 1: Source: LaCanne CE, Lundgren JG. 2018. Regenerative agriculture: merging farming and natural resource conservation profitably — Link

Long-Term Profitability

The study conducted by Claire Canne and Jonathan Lundgren also demonstrated that regenerative corn fields can boast nearly double the profitability compared to conventionally managed counterparts (see image below).

How?

The diminished reliance on external inputs such as herbicides and irrigation translated into substantial cost savings as natural processes assumed a more prominent role. Furthermore, the volatility inherent in fertiliser costs significantly amplifies instability in the farm gate value of the commodity, increasing the business risk farmers take.

Moreover, diversified crops and livestock production adds additional revenue streams and mitigates the price volatility exposure and risk of single-crop production. Finally, farmers may also be additionally rewarded for their sustainable practices through Payment for Ecosystem Services.

As the old saying goes, don’t put all of your eggs in one basket. The principle of ecological diversity used in regenerative agriculture could be thought of as product diversification and, therefore, good business practice.

Figure 2: Source: LaCanne CE, Lundgren JG. 2018. Regenerative agriculture: merging farming and natural resource conservation profitably — Link

Notably, the study concludes that soil organic matter was a more important driver of proximate farm profitability than yields were, partly because the regenerative farms marketed their products differently or had a diversified income stream from a single field.

In sum, regenerative agriculture has been shown to be economically positive for the farmer, let alone all the other ecological and social benefits not accounted for in this study.

Okay, but what about the period where there is a dip in profitability?

Since only some farmers have the resources to weather a dip in profits, they will have to receive support during this transition.

Addressing the challenges inherent in the transition to regenerative agriculture underscores the necessity for a nuanced financial framework that acknowledges the specific circumstances of farmers undergoing this transformative process. To alleviate financial burdens during initial periods of reduced profits, it is imperative to consider reduced interest rates and payment structures (such as interest-only payments) tailored to coincide with individual farmers’ needs.

Moreover, extending loan terms gives farmers additional time to recoup investments and establish regenerative practices. This extension acknowledges the time required for the land’s regeneration and contributes to the farmers’ overall economic sustainability during this transitory phase.

Furthermore, innovative loan-to-lease agreements and extended mortgages emerge as a promising strategy. These agreements incentivise farmers to invest in land regeneration and offer the prospect of land ownership and, consequently, stewardship. This dual incentive structure not only aligns financial interests with ecological goals but also provides farmers with a tangible stake in the long-term success of regenerative practices, fostering a more sustainable and secure pathway for agricultural transition.

Traditional financial services have been slow — to say the least — in adapting their framework and methods to accommodate these realities. The good news is that innovative players have started to fill in the gap. Check out MAD Agriculture, Iroquois Valley Farmland REIT, and Fractal for examples of organisations deploying some of these tools.

Transitioning beyond conventional financing solutions, supply chain partners can play a pivotal role in supporting those navigating the shift towards sustainability. Noteworthy initiatives include Nestle’s commitment to invest US$1.3 billion over the next five years in farmer training, premium pricing for regenerative agriculture products, and direct investment and lending support to aid suppliers in the transition — read more on TransCap’s thinking on Advance Market Commitment for regenerative agriculture here.

These are just a few tools available. Other include government procurement of regenerative products, subsidies for biofertilizers and cover crop seeds, tax incentives, transition loans, payment for ecosystem services and new insurance products, to name but a few.

What next?

For farmers, the transition to regenerative agriculture involves a nuanced trade-off between short-term challenges and long-term benefits. Viewing the initial reduction in yield and increased costs as integral components of a transformative process toward sustainable and resilient farming practices is essential. Over time, the positive reinforcing benefits will likely outweigh the initial risks, fostering a profitable business that is more resilient to external shocks and environmentally sustainable.

Some of the financial mechanisms to reduce the farmer's risk are out there, and we’re actively working on new ones; what we also need is collective effort to persuade all the different stakeholders to engage with the challenge. Commodity traders and supply chain partners need to increase the consistency and volume of regenerative products bought from farmers. Investors need to deploy more capital to reduce the financing needs of farmers who already have the appetite to transition. Additional technical capacity building, farmer network and training are also needed to enable more farmers to join the movement — topic for the next field note.

Complex issues require systemic solutions. Single-point intervention (such as flexible financial loans to finance the profit dip) is not enough to drive a system transformation; we also need to activate other leverage points of the system and nest them within a broader set of interventions.

Get involved

Check out TransCap’s prototype home page to learn more about our motivation and the starting point of our activities around the Regenerative Agriculture prototype.

If you would like to be involved, get in touch via community@transformation.capital and continue reading about the ideas fuelling the TransCap Initiative here.

Citation:

Helping Farmers Shift to Regenerative Agriculture. (2022, March 14). Bain & Company. https://www.bain.com/insights/helping-farmers-shift-to-regenerative-agriculture/

LaCanne CE, Lundgren JG. 2018. Regenerative agriculture: merging farming and natural resource conservation profitably. PeerJ 6:e4428. https://doi.org/10.7717/peerj.442

Tscharntke, T., Clough, Y., Wanger, T. C., Jackson, L., Motzke, I., Perfecto, I., Vandermeer, J., & Whitbread, A. (2012, July). Global food security, biodiversity conservation and the future of agricultural intensification. Biological Conservation, 151(1), 53–59. https://doi.org/10.1016/j.biocon.2012.01.068

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