Q&A: The Trickiest Part of Regenerative Agriculture is Financing It. But That’s Fixable.

Dec 2nd 2021

Mad Agriculture founder Philip Taylor is on a mission to “radically rethink and reimagine how we use financing, ecology, and markets to regenerate the world.”

It’s the financing bit that can be the trickiest.

Taylor helps farmers plan for and implement practices that promote soil health as an alternative to what he calls “extractive or industrial approaches to using resources” — otherwise known as regenerative agriculture. The benefits of regenerative farming, for the environment and for animal and human welfare, are clear. But transitioning to regenerative practices is labor-intensive and costly—and tough to finance, Taylor explained. Traditional agriculture financing methods that were built to support the status quo can stop farmers’ regenerative transition plans in their tracks.

That’s why Taylor and other agribusiness experts believe now is the time to change the way the industry thinks about financing, shifting the focus from short-term yields to long-term risks. A few industry leaders recently sat down with Bank of the West to discuss how financial institutions can support regenerative agriculture initiatives with unique financing solutions. Included in the conversation were:

  • Finian Makepeace, Co-founder of Kiss the Ground, a Los Angeles-based non-profit focused on promoting regenerative practices
  • Philip Taylor, Executive Director of Mad Agriculture, a Boulder, Colo.-based organization providing expertise and financing for farmers using practices that support the environment
  • Harley Cross, co-founder of Land Core, a non-profit advancing soil health programs and policies that create value for farmers, businesses, and communities
  • Vincent Aniort, Managing Director and Senior Banker at Bank of the West, Agribusiness and Food
  • Kevin Oflazian, Regional Business Banking Manager at Bank of the West.

How do you define regenerative agriculture?

MAKEPEACE (Kiss the Ground): Agriculture across the US and the world has significantly damaged the viability of farmlands at vast proportions and at an unprecedented rate. Regenerative agriculture is the process of farming and simultaneously regenerating the land. It’s about getting the soil back to its highest-performing state, which will ultimately increase yields, and offers numerous environmental benefits.

TAYLOR (Mad Agriculture): Practices often include things like cover cropping, intercropping, adjacent compost, diversifying, or creating new cropping systems with specialty crops.

What are the challenges associated with costs and finding funding for regenerative ag farmers and companies?

TAYLOR: Farmers that aspire to become more regenerative adopt approaches that are often perceived as risky because they have not been a part of the large-scale industrial commodity system. When we went to implement these visions that leaned into conservation planning and regenerative practices, farms were often hamstrung by the financial products the bank offered. They weren’t flexible enough to allow them to reinvest in the land.

The farm banking sector, especially with lines of credit and operational capital, operates on a one-year time cycle. But reinvestment back into soil health requires a much longer timeframe of at least five years, if not 10 years.

MAKEPEACE: One of the big things we hear from farmers is how much they’re under the gun to pay for input costs, let alone the loans at that payback period. But if we can help farmers reduce their input by 30 percent or 50 percent in the first two years, that can alleviate a lot of the stress and allow them to make investments into things that help them move to regenerative practices.

This is a winning financial strategy given the risk farmers are facing and how precarious loans are. We’re simultaneously able to help them save money on input costs while maintaining or increasing yields in livestock holding capacity.

How can financial institutions adapt to address this opportunity?

CROSS (Land Core): We’ve been trying to give lenders tools to participate in the process, not through new dollars but through the savings created through risk mitigation. For example, deferred payments at the time of planting a cover crop can help the producer with the cash flow to pay for it. That payment can be tacked on the end of the loan.

There are many creative ideas now being developed to see what levers the lending institutions have. We’re also looking at pairing those opportunities with federal or state incentives and looking for partnership opportunities so that when a producer wants to implement certain practices, there’s implicit support from those other parties.

OFLAZIAN (Bank of the West): Engaging the private lending industry would offer huge benefits as it would expand financing options to a much wider market. We at Bank of the West have a product called a development loan. It is structured with interest-only payments for the period of time required to plant new crops and allow them to mature to full production at which time the principal payback period begins.

What is the average size requirement for a farm to receive funding like this?

CROSS: In some cases, there’s a minimum size of 2,000 acres. The nice thing about this lens of risk is that it’s much more democratic than the carbon market idea, which doesn’t really benefit you unless you are a fairly large producer. But with regenerative agriculture, if you can defer one payment per year, and that allows you to implement cover cropping, you can do that on one or 100,000 acres.

MAKEPEACE: It varies, though. Even smaller farms with 10 to 200 acres can receive funding.

What kind of data might lenders use to structure these loans?

OFLAZIAN: UC Davis has a good ag research department with a lot of information for expenses per acre, yields for different crops and regions. It has proven to be fairly accurate. Take, for example, an almond development. The lender may want to know the expense per acre, depending on where it is planted and the specific variety of tree. The data would provide average yields, historical prices, and determine projected income five years from now. After full production of the orchard is achieved, the farmer would then start repaying principal over a longer amortization, say 15 or 20 years.

Will there be a greater need for these innovative loan products?

CROSS: Yes, especially because there are questions about yield stability in the future with such erratic weather. There are just more variables to deal with. The more we can understand how soil health practices de-risk yield over time, the more accurate these predictions will be. Therefore, there is more incentive for farmers to adopt soil health practices.

ANIORT (Bank of the West): We’re seeing more and more financial transactions with a sustainable angle. The sustainability-linked loans and the green bonds, as we call the main instruments, are increasingly tapped by large companies. I believe the institutional framework is coming in the U.S. You’re going to have more dialogue toward sustainability with large food companies requesting sustainable and organic products on a regular basis. Banks and insurance companies as investors and as issuers will be an important part of that.

Farmers around the world are proving the value and viability of choosing regeneration over extraction in their operations. As more financial institutions develop creative, tailored loan products that help enable regenerative practices, their adoption is bound to accelerate.

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