Valuing Agriculture’s Natural Capital: Insights from the AFI Roundtable

October 17, 2019

This week I had the opportunity to attend the sold-out Australian Farm Institute ‘Valuing Agriculture’s Natural Capital’ Roundtable, as part of AgWeek in Canberra. As usual, I was impressed at AFI’s ability to convene stakeholders across sectors and perspectives, bringing farmers, researchers, investors, and policymakers together for frank conversations on this complex- and even sometimes controversial-topic.

Here are a few of my insights.

Same science, new market conditions

The science of valuing agriculture’s natural capital is not new. Organizations like Land and Water Australia and CSIRO, among others, have been studying the benefits of certain practices, developing standards for measurement, and creating tools for monitoring for decades. But what is new today are the market conditions in which we operate.

For example, more private sector capital is interested in agriculture, seeing the sector as an opportunity to do good (i.e., ecosystem services) and do well (i.e., financial returns). This includes ESG-driven funds, impact-oriented family offices and high net worth individuals, and even Venture Capital funds. The pressures of today are also different. Social license and rapidly shifting consumer preferences are raising the bar for environmental performance and transparency. And finally, technologies are more affordable and accessible than ever, making it more practical and commercially viable for producers to adopt new practices and tools.

As Richard Heath, Executive Director of AFI, said in his welcome note, “We are now perhaps at a point in society where social expectations on the willingness to pay for the delivery of ecosystem services from natural capital will enable new markets to develop; so that rather than costs in transition, there are now opportunities.”

No silver bullets, but lots of challenges

Despite these changing market conditions, valuing agriculture’s natural capital at scale is not without significant challenges. Agriculture is a complex system, and there are no silver bullet solutions. Challenges highlighted at the Roundtable include:

  • Capturing baseline measurements is expensive, and it’s not clear who pays. One option is consumers, via premiums or, as suggested by Professor Alex McBratney, a tax on food implemented by the supermarkets. Another is through government schemes, such as the existing Biodiversity Conservation Trust in NSW. Premiums are unreliable, however, and the government schemes can be piecemeal, controversial, and at risk of adverse consequences.
  • Current funding structures and systems fail to appreciate the complexities and practical realities of farming. They are also short-term. As highlighted by Professor Richard Eckard, 1–3 year contracting cycles for R&D are inappropriate to drive ecosystem outcomes, given natural systems work on multi-decadal timeframes.
  • Navigating the system is still too expensive and not practical for many farmers. In addition to the uncertain benefits, the farmer panelists at the event struggle with red tape, fragmentation (i.e., many different schemes and standards), and the still-too-high costs of monitoring and measuring. In summary, there’s still a high level of skepticism and a low level of adoption from producers.

Multiple ways for farmers to benefit from ecosystem services

Though the challenges are significant, so too are the opportunities for producers to benefit from valuing agriculture’s natural capital. At a high level, the benefits fall into three categories: (1) direct payments for delivering the service; (2) indirect payments; and (3) valorizing the outputs.

Direct payment schemes include biodiversity and carbon credits. Indirect payments may be in the form of improved financial terms and/or insurance premiums. Opportunities to valorize the outputs include premiums from consumers, market access, and productivity benefits.

One of the producer panels was asked how significant they see this opportunity: “in 2030, what percent of your income will come from ecosystem services?” The responses ranged from “I haven’t thought about that” and “maybe 5%” to a confident “50%.”

Change will be led by producers & unlocked by business model innovation

There was much discussion of who will lead this effort in Australia. Will government create policies and fund the transition to new practices, for example through a HECS equivalent? Or will market-based incentives and public sector players need to take the reins?

My takeaway is that while government, research and industry organizations, and even philanthropists will be necessary, producers are the ones leading the way. Producers are already implementing regenerative practices and realizing productivity benefits. They’re also experimenting with carbon-neutral certifications and other branding efforts to gain consumer premiums. And they are unlocking new income streams, such as Australian Carbon Credit Units (ACCUs), to help stabilize income during tough times.

But producers cannot do it alone.

I was asked more than a few times during the day why I was there, as we’re known for being all agtech all the time. Why the interest in regenerative farming, carbon credits, and ecosystem services?

I believe that lean innovation and new business models are critical in breaking the longstanding tradeoffs between profitability and sustainability in agriculture. Nowhere is this more true than with natural capital. And startups in particular excel at technology-enabled business model innovation- this is the focus of our work at AgThentic

Bringing new business models, technologies, and ways of thinking to agriculture presents an opportunity to lower transition and compliance costs, simplify monitoring and measuring, and attract new sources of capital. Startups globally and in Australia are already pursuing these areas, and we’re excited to support both them and the primary producers leading the way.

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For more of the leading work from the Australian Farm Institute, check out their website.

For more on Agriculture’s Natural Capital and to hear from some of the farmer panelists, check out our AgTech So What podcast.