Is Regenerative Agriculture Profitable? | Sarah Day Levesque | Regen Rev 2022

So let me start by telling you a little bit about me and how my work fits into the regenerative agriculture ecosystem. In 2016, after spending a decade working with conventional agribusiness and with conventionally minded traditional agriculture investors, I made a career change and decided to join the team@acres USA. Hopefully many of you guys in the audience are familiar with Acres, but. But if not, be sure to check us out@acresusa.com where there's lots to learn. Acresa has spent more than 50 years working with farmers seeking a different path forward, one that doesn't leave them tied to highly ecologically and economically extractive and intensive ways of farming. When I first started working with the farmers in our community, many things stood out. In contrast to the community I used to work with, the dedication to soil health, to ecosystem health, and to human health was very strong, but also that this regenerative way of farming was not being funded the way agriculture in the conventional space was. I had spent 10 years watching agricultural investment from venture capital, private equity and institutional investors pick up steam, so much so that farmland was becoming an asset class all its own. But this capital was not flowing to regenerative. So in 2018, I founded Regenerative Food Systems Investment to address the tremendous need and opportunity to bring more capital to not just regenerative farming, but to build a system around regenerative farmers so that the transition, excuse me, to a new food system can be truly lasting. So even in the three years that RFSI has been existence, we have seen tremendous growth in the investment space, just like we've seen tremendous growth in regenerative agriculture in general. And I continue to believe that investment capital has a significant role to play in shaping a new, healthier food system. Which is why I am super excited to be speaking with you today. A little bit on that topic. Let's see switch slides here. What we've talked about so far today, and what we will continue to talk about through the rest of this event, is a shift, a shift in practices, a shift in approach, and a shift in mindset, which all lead to significantly different outcomes at the farm level and beyond. Many of these outcomes are outlined here in this slide, and they include agronomic, operational and environmental, consumer and climatic and ecosystem level benefits. But for the next little bit, I'd like to talk about what the economic outcomes of regenerative are. So economic outcomes, although often garnering less attention than the agronomic or climatic outcomes, are important to discuss because the prospect of positive financial returns is imperative to incentivize what can be risky wholesale changes? In other words, if the economic outcomes don't exist, we won't be able to scale the transition of regenerative agriculture. Let's start this talk about economics with one of the biggest misconceptions about regenerative agriculture. This biggest misconception, or maybe I should say discussion or debate, is the assumption that regenerative agriculture leads to lower yields and therefore is not profitable. So what is the deal with yields? Like many things in agriculture, the answer to whether yields decrease with regenerative farm practices is it depends in large part on crops and local conditions, and also sometimes in how long you've been practicing them. There is an increasing body of research seeking to understand the connection between yields and regenerative practices, and I want to share just some of the highlights here today. So we'll start with Rodale Institute, which has been running side by side field studies for the last 30 years comparing organic and conventional agriculture. Their research has shown that after the one to two year transition period where yields do tend to decline, there is no difference between conventional and regenerative farming in terms of yields. And even more what they show is that in stressful conditions, particularly during droughts, the organic fields perform better because they are more resilient. This is because the soil contains more biomass and therefore can absorb more water. American Farmland Trust looked at the economic impacts of switching regenerative management on eight farms across the US Representing a diversity of crop and livestock production. The case studies examined which practices on each farm created an increase or a decrease in income and costs. What they found was that all eight farms showed meaningful growth in net per acre income with all the regenerative practices. South Dakota State University surveyed farmers to compare the profitability, resilience and optimism of regenerative versus conventional producers. That poll found that 31% of of regenerative practitioners increased their profitability in 2019 compared to just 12% of conventional producers. It found that 83% of regenerative producers expected their operations to be more resilient to extreme weather compared to just 60% of conventional practitioners. And it showed that 69% of regenerative practitioners compared to 36% of conventional expected increased profits over the next three to five years. Years okay, and last one, I promise. In 2018, a study published by Jonathan Lundgren and Claire Lecan investigated how moving to more regenerative systems might affect yields, pests and profitability on 20 farms. The researchers looked at soil, organic matter, pest presence, crop yield and profit and as expected, crop yields decreased in regenerative Systems and by 29%. But that wasn't the whole story. The study found that the farms with regenerative practices were 78% more profitable than conventional plots. The increase in profitability in all of these cases can overwhelmingly be explained by two main factors, that is Input costs and end markets. Regenerative agriculture can be significantly more profitable than conventional agriculture because the system practices can lead to lower input costs, the ability to grow higher value crops and access new markets and premiums, and as an additional benefit, increase resilience, reducing risks associated with volatile weather. So let's walk through these just a little bit, starting with one of the biggest economic drivers of the transition to regenerative and that is input costs. Farmers are operating on thin margins. Low commodity prices combined with rising input costs led to a stagnation or a decline in overall farm profitability in 2019. Rising input prices in particular continue to impact profitability in 2021 and show no sign of letting up. From a December DTN report on fertilizer costs, Many types of fertilizers are now at record price levels, which is likely going to have a big impact on corn break even levels. Several phosphate and potash fertilizer products have increased by 15 to 20% since late September, while the cost of anhydrous ammonia, urea and other nitrogen fertilizer products have increased by approximately 50% in the past two months. The rapid increase in fertilizer ingredients has been caused by shipping problems in US Ports, very tight supplies of ingredients and really high demand. And lastly, where fertilizer expenses typically account for about one third of corn farmers crop input costs. In 2022, this cost could rise to 45% or more. So given the significant role that input costs play in overall expense, you can understand how reducing or eliminating this could support positive economic outcomes, profitability and increased interest in regenerative practices. Revisiting the 2018 Lundgren and Lacan study that I mentioned just a few moments ago, we can compare the revenue and costs of conventional and regenerative production systems. This chart shows that comparison. The heights of the bars represent average gross profits across 40 fields on 20 farms. Profit was calculated using direct costs and revenues for each field and excludes any overhead and direct expenses. Regenerative corn fields implemented three or more practices such as planting multi species cover crops, eliminating pesticides, abandoning tillage, or integrating livestock. Conventional corn fields used fewer than two of these practices. What they found and what you see here in this chart is that regenerative systems had 70% higher profit than conventional corn fields and specific to input costs, you can see that the corn seed costs and irrigation costs, and those are represented in the orange and the green, they went down. And fertilizer costs, which is that light orange or tannish bar in the middle or band in the middle, those went down significantly. So the study concluded there were two keys to success for this approach to farming. First, that by promoting soil biology and organic matter and biodiversity on their farms, regenerative farmers required fewer costly inputs like insecticides and fertilizers, and manage their pest populations more effectively. Second, soil organic matter was a more important driver of proximate farm profitability than yields were, in part because the regenerative farms marketed their products differently or had diversity diversified income streams from a single field. So that brings us to the second driver of profitability and regenerative agriculture. New markets and access to premiums. The ability to diversify crops and grow higher value crops that can be marketed at a premium is another big reason regenerative farming cannot just be profitable, but more profitable than conventional farming. So what does consumer demand look like and how does this play into premiums? Well, we know consumer awareness of regenerative specifically is still pretty low. 16 to 16% of 16 to 44 year olds are aware of regenerative agriculture, but this number is growing. And that's because consumers are increasingly seeking to understand where their food comes from and how it was produced. They want their food to also be a reflection of their values. And and today that means good for people and planet. According to our friends at Planet Forward. The folks at Planet Forward explain that 55% of all growth, all growth in CPG came from sustainably marketed products. From 2015 to 2019, that consumers will pay a 39% premium for sustainably marketed products compared to conventionally marketed counterparts. And 69% of consumers have changed the products they use due to concerns about climate change. So these trends will continue to drive demand and premiums for regeneratively produced goods. So the question for me then is if the agronomic, ecological and economic outcomes are there, why are there still barriers to adoption? Jennifer o' Connor and Guide Light Strategies funded by Patagonia, conducted a study on this very topic. Among the many barriers they identified, we found these to be the ones that we hear the most about from the farmers we work with. The first is behavior and cultural change. In other words, the idea that changing away from the predominant paradigm and mindset is difficult. We are talking about a conventional way of farming that has been with us for decades and decades now. Now the Good news for you all is that when it comes to this barrier, you're all here at this event demonstrating that this barrier is already coming down for you. So kudos on that one. The second barrier that stands out to us is trusted technical assistance. As Guidelight Strategies reports, farmers and ranchers are extraordinarily busy people managing complex businesses in a risky, low margin, ever changing business environment. I'm sure you all are very well aware of this. This reality makes taking time to learn about and experiment with new management practices a slow and time consuming process. Without technical assistance, many farmers do not have the resources, time or or energy to learn about, plan, implement and monitor new practices on their own. The third barrier is regenerative supply chains. So success for regenerative producers in large part relies on premium end markets. If the end markets don't exist yet, or the processing infrastructure to create the end products doesn't exist, then the premiums could be forfeited and the incentive to transition is hindered. And lastly, the fourth barrier is financial capital and incentives. One of the biggest barriers to farmers actually adopting regenerative techniques is the added costs and risk in changing any given practice. Even if regenerative actually leads to better economic outcomes, there is still initial risk during the process of change when transition costs are highest and premiums are not yet attainable. So this chart, which probably looks familiar to many, explains the final night. Excuse me, the financial risk of transition. Well, while beginning the process of changing farming techniques, initial yields will be lower, leading to less market marketable produce and less profit. A Bain and Nature United study suggest that it will be four years until a farmer would break even and make the same amount they would have before transitioning. However, other studies have said the break even could be achieved in two to three years. The key here, however, is that after break even, the farmer is better positioned to reach higher profits than if the farm had not made the transition. So we see with all of this that there's great potential for longer term resilience and economic success, but still risk in the near term that inhibits adoption. So the question now is, where do the solutions lie? Well, luckily there are lots of people and organizations working on this, such as the organizations that are bringing you this event today, the two organizations that I work for, and so many others, some of whom, many of whom I expect, are in our audience today. As I mentioned in my introduction, I work at this fascinating intersection between regenerative farmers and investors. And at this intersection, it's easy to see that the opportunity that regenerative agriculture holds for farmers and communities is also an opportunity for investors and funders. So let's take a look at that. In 2020, the USFRA transformative Investment Report mapped the capital flows to agriculture in the US on the left side you will see capital allocators. And I don't know how big that chart is for you all, but those capital allocators include institutional investors, retail investors, and the very tiny strand at the bottom is the government. And then on the right hand side is where the capital is flowing. The thicker the line going across the screen, the more capital it represents. So for example, farmland receives the most capital which is the blue indicated, the little blue bar with 442 on the right and followed by farm operating capital and then ag value chain companies as a distant third. What I want to point out here is how much capital is flowing to agriculture. So if you look at the bottom of the chart there, $972 billion is going to to agriculture. And I also just wanted to note that of the 972 billion, more than half of that is coming from investment funds. So that's that circle at the the top of your screen. Now who wants to guess how much of that is coming to regenerative? Go ahead and take a guess in the chat if you'd like and I promise I'll tell you shortly. But before I do, let's take a look at the opportunity for regenerative agriculture. In the US alone, the 2020 Soil Wealth Report estimated that more than $700 billion in investment will be needed over the next 30 years to scale regenerative agriculture and that that investment will generate $10 trillion in net financial returns. $10 trillion. That's a lot. Yet to this point, only 47.5 billion in investment is regenerative. In regenerative has been executed. So I haven't been able to look at the chat, but did Anybody guess that 1 47.5 billion perhaps? I think, yeah, I think somebody said 1% which is even higher. So there is significant opportunity remaining and funders are increasingly catching on to this. In the past few years alone, we've seen the interest in dollars in this space increase. In fact, from 2018 to 2020 in a sample of 108 companies, we saw a dramatic increase in funding both to companies and funds working in regenerative. It went from 49 million to 1.35 billion. So and I really think that this is only getting started. So we're seeing a new crop of investors who are seeking more than just capital returns. They want to build solutions and generate impact. They are looking for some of the same public and private benefits that also drive farmer and consumer interest, according to the Soil Wealth Report and these benefits I've shared on the screen here, also from the Soil Wealth Report. They include things like nutrient cycling and carbon storage to improved yield stability which we've already talked about, resilient food systems and reduced pests and disease. The desire for these benefits is also evident by government interests and consumer demand. Governments, corporations and CPGs, for example are making commitments to net zero ambitions and more climate friendly and regenerative sourcing as seen last year at the COP26 meeting in Glasgow. Meanwhile, consumers are increasingly aware of and demanding products that are good for people and planetary as we already discussed. So we can see this change in investor interest approach and mindset in the language that they use and the investments they're making. Here is just a sample of the way these investors speak to the opportunity for regenerative, demonstrating an increasing understanding that the connection between soil, human, ecological and economic health is far deeper than once thought. For example Trailhead Capital, which is that top one up on your screen, they are a relatively new venture capital fund and what they say is we believe regenerative agriculture represents the greatest opportunity to improve human health and planetary health and their investments in on farm and off farm technologies support this statement. So while capital allocators are starting to understand the interconnectedness of the food system, and particularly that soil health and and the way we do agriculture impacts the entire system, we are seeing the capital flow where demand for regenerative is strongest to the farm and to the consumer. Along the value chain. We are seeing capital flow to farmland first and foremost. So $22.8 billion of the 47.5 billion already invested in regenerative agriculture has been in farmland and real assets. We've seen an increasing number of the funds and REITs designed to invest in the transition of land from conventional production to regenerative in the past two to three years. So there's new funds like Clear Frontier and Biome Capital who are joining veteran veterans operating in the space like Iroquois Valley Farmland, reit, SLM Partners and Agriculture Capital. We also see increasing investment in new solutions and technology and that support the farmer and enable regenerative production. Examples of this are investor investments in inputs like biologicals and tools and services, think innovative fencing for pastured livestock. And of course we also see capital flowing to carbon markets. On the other end of the value chain, the consumer side, we're seeing investments in new Food brands and technology to support CPGs in measuring the impact of their supply supply chains. Here I think of companies like how good investments in these areas alone represent tremendous opportunity for the next decade and beyond. But we can't truly build a regenerative or even sustainable system if some of the pieces are missing. So where isn't the capital flowing in this diagram? I'll leave that as an option in the chat while I take just a quick sip of water. Nobody? Okay, all right, I will tell you the middle. So where we haven't seen tremendous investment yet and where there is a great white space for increased research attention and investment is in what we call the missing middle, the infrastructure, processing and distribution of regenerative crop crops into regenerative ingredients and end products. Even though Covid shown a bright light on the weaknesses of the conventional supply chains we've built, we aren't yet seeing the capital flow to this space for regenerative at the same rate as we do at the other ends of the supply chain there, the farm and the consumer. But I think this is changing as we see an increasing number of individual investors and funds see seeking to learn more about the opportunity to invest in the middle. And as a result, I think the supply chain should continue to strengthen. So you might be asking yourself, why is Sarah telling me all about investors coming into the system? It's because when we talk about barriers to regenerative adoption, namely risk capital, technical assistance and new markets, the capital flowing into regenerative is increasingly trying to address these things. Just as approaches to the way we farm need to and are shifting, so too are the approaches to investing in agriculture. The evolving approach to ag investment in finance seeks to finance transition, de risk transition, provide technical training and innovative tools for transition, build supply chains and so much more, including bringing more equity into the system. There's an increasing number of organizations innovating with new approaches to funding food system solutions, and I'm going to talk just very briefly about a couple of them. So one that stands out in their efforts to de risk transition to regeneration is Mad Agriculture's perennial fund, which I hope many of you have heard of, but if not, we'll give you a quick summary right here. The nonprofit developed a new type of loan to address the gaps that exist from a lack of adequate bank and farm bill funding for land stewards. What's different about their approach in this vehicle is that the team really understands the risks of transition and has yet set up a system to address the barriers that can get in the way of success so for example, they set up a long term 10 year revolving operating loan that is low cost and offers flexible repayment options so that producers aren't bearing the brunt of the expense during the riskier transition period. The fund's team works with growers to assess resources, create a transition and a business plan, and provide technical assistance throughout the transition. And the team is now also working to secure end markets for regeneratively produced products to ensure those transitioning are able to capture the premium value for their region crop. Because remember we talked about that was a huge part of being able to make that transition knowing you could make that premium. So if you haven't already learned about Perennial Fund, I did include their website down there and where you can learn a lot more and they have some great resources as well. Oopsies. Spoiler alert. I went ahead one Another example of a capital allocator taking a different approach is Replant Capital. Replant Capital was founded in the past few years and works to improve farmer profitability and environmental outcomes through financing the transition of farmland to regenerative and organic agriculture. In collaboration with farmers, agronomists and food companies, A Replant seeks to build a new financial system that can support the scaling of new agricultural approaches that provide important ecosystem services. They do this by deploying capital to farms through an evergreen private debt fund. One unique way they approach this and some of the barriers we talked about today is that they work through the supply chain to support farmer transition. So what I mean for that is, and here's an example, the company dedicated 40% of its $50 million initial fund to support Farm Farmer Partners of Danone North America. By making loans to Denone's farmers, Replant is ensuring that there is a long term stable buyer for the farm's products which also makes the loans more credit worthy. So just another model for you. So those are just a couple of examples, but the truth is that there is an entire ecosystem of financial vehicles developing to support Transition to regenerative food systems and I've included some here, but this is by no means all of them. The ecosystem is much bigger and really growing every day. These stakeholders do this not only by creating vehicles to reduce financial risk, but also by investing in technology and tools that can support transition on the farm, by investing in processing and infrastructure that can help get regenerative products to premium markets, and by supporting the food companies that have regenerative supply chains. With these co collaborators in the regenerative revolution, the barriers that we discussed that are inhibiting adoption of regenerative agriculture are going to continue to get smaller and smaller and the opportunity, well, that's just going to keep getting bigger. So thank you all. That's all I have. And I will check the questions that I think the team was sharing with us and I'm going to take my slides down. Here we go. Okay, so I have some questions up here. What can we do? The first one of the questions is what can we do to help transition from conventional to regenerative? I guess my question would be who is the we in this? But I think there's a lot of stakeholders that need to be taking apart here. And one thing we've really talked about and what that report I report on that Jennifer o' Connor did with guideline strategies and is there's many barriers and many stakeholders. So I think education is a huge part of it. Education of farmers and how they can have the tools and education of also the other players that are at large. So food companies need to be educated. Investors need to continue to be educated. So that would be my biased answer, working with educational companies. But I think also the other ways we can help facilitate this is continuing to create tools and continuing to reduce risk, which I talked about. I think risk is in my mind, probably one of the biggest barriers of the perceptions of risk. So really driving home what the realities are and continue to do research that shows what risks actually are and how they can be mitigated. Okay. Okay. So this is an interesting one. Dennis and Steve, our good friends Dennis and Steve asked what buzzwords do you suggest to help attract do you suggest to help attract investment and investors? That's a super good question. So one, I think it's kind of hit or miss. I think actually the word regenerative can be hit or miss too. So it's a buzzword right now. But I think some people are averse to that as well. But I think increasingly soil for sure. I mean, soil, if you guys in this world can believe it. Soil is a buzzword. I think holistic. If you're looking at the investors we're looking at, if you look at holistic and systemic solutions and promoting how it fits into the system are another buzzword. But I would also encourage and I don't have a very good picture of the chat here, but I would love to hear what the audience has to say about this too. So if the audience wants to drop any buzzwords in there, that would be amazing too, because I'd love to hear kind of what they think their buzzwords are. Oh, I think somebody just dropped one in. It is, is it resilience? I love that. Resilience is a great one. I think. I love that one. Yep, keep those coming. Let me read these questions. This is interesting. Okay, I like there's a question here that says what is the potential role of carbon sequestration, voluntary carbon markets in funding and incentivizing transition? I would love to hear what farmers say, but from what we've heard, it is secondary right now. So the markets aren't quite developed enough and aren't. And farmers aren't quite. And they're a little confusing right now too. Right. Carbon markets. So I think right now in terms of incentivizing funding and transition, I think they're secondary to all the other benefits we talked today talked about today. I think as they get more developed, they will become a bigger part of it. But from, from what we've heard, especially from some of the larger scale investors that are looking at farmland, they will evaluate farmland and the investment opportunities for all of the other benefits that can come from it. And then the whatever they can get from carbon sequestration and carbon markets will be that kind of added benefit that they'll have. Great question. Thank you. And I love this. I'm going to read a few more of these. So harmony with nature, mimicking nature. Nature is a great one. Agriculture and water quality. Water quality is one. Yes. That I don't know that we talk about quite enough. So going back to the question of how we get buzzwords and investors, there is a whole ecosystem of water investors that probably have not been brought into the regenerative space enough. And so I think tying what we're doing with soils and farmland would be a wonderful way to bring in another pool of capital to the space. Good question. Ian, what questions should farmers ask in early discussions to weed out the real investors from the time wasters? And that's a really good question. And so what we talk about in our investor slash activator community, so we call activators those folks that are going to activate the capital that investors get. So farmers would be included in that. And what, what we say is that it is not just about investors vetting investment projects, but it is also so much about those activators making sure that they're getting the right kind of capital. So Ian, I think the answer is really what your value systems are. But I think before you have those conversations, it's identifying what kind of capital you want, what kind of timeline you want to think about it. You want to have and really seeing what the priorities are for you and then framing those questions around that to make sure that you understand what the, what engagement that capital allocator wants to have in your operation. So a lot of things we talk about in our space is how patient is the capital. You know, are they going to want a return on their investment? What size return are they going to want? And are those realistic for what you're trying to do in your operating preparation? Okay, and let's see. Do I. Feel free to holler at me team, if I, if I'm running out of time here. Reasoning, I don't. Dennis and Steve asked what distribution amongst large corporations versus small farms in terms of investment? I don't have that number yet. I'm not sure if anybody does. But it would be something that we would, that we would want to look into and I would love to get that information. David asked, what are the highest leverage places to investment outside of the stifling corporate racket? I'm not 100% sure what you mean, David, but if you include your, if you comment in the chat, I will try to get to it and try to, because I think that's an interesting question. And Kevin asks, are you seeing water quality trading or wetlands banking as a precursor or side benefit of regenerative agriculture? As I mentioned earlier, I don't think we've seen that enough yet. Although I do think of some of the investors that are working in our space. It is on their radar. So that is one of the things underneath it, that if they were evaluating investment, if it did bring water into the equation, that that would be kind of a plus for that investment. There is a gap in connecting farmers to growing craft markets like spirits, beer and health food. What suggestions do you have to connecting these parties? I think that is super interesting and like I said, that's where some of the, that's where some of that missing middle comes in. But I also think that is a communications tool. Right. So how do we bridge, bridge the gap between those people who are growing it and who are those people who are sourcing it? Sourcing the ingredients. I would have to look into some of the resources that we have available for that. But I would say communication and networking would be number one. And then I go back to education for that. Just reading. Yeah. So another question. What do you feel about the source of capital as it stands? I mean, there's a lot of large investors entering the fringes of the space who have very opposite purposes regarding regen ag that is 100% a huge topic of conversation in our space and I think, I think something that needs to always be talked about. So even within our community there is debate on the types of returns and expectations of larger investors or investors that perhaps are more accustomed to investing in conventional agriculture. And so it goes back to educating and going back to Ian's question about finding the right investment capital for you. I truly believe that there are so many investors and funders out there that already understand and embrace this idea of regenerative. But what we're trying to do is the same thing we're trying to do with regenerative agriculture. We're trying to change a system within, within an already existing system. So we're trying to change to regenerative farming within what is so strongly a conventional farming system. So the same thing is happening with investment. We are trying to create new values around how we invest capital into regenerative agriculture while we're working within a financial and investment system that has not, ever has not previously had these values. So I think we will continue to, to evolve that. But it's going to take a lot of education connecting farmers and, and activators to the investors so that they can continue to learn and evolve, just like we're doing here at this event when it comes to the agronomy of a regenerative ag as well. Okay, and last question I see pop up here. Which region of the world is mainly concerned by regenerative investment? Some of the hotspots I think are here in the US but also Australia has a small, small, small but evolving ecosystem for this and for ecosystem services. My time is up here. I appreciate all the questions. I would love, love, love to follow up with anyone who has more questions and also be happy to provide any of the sources that I used in my presentation today so you guys can go off and learn more about this stuff.