agri_investor

by Louisa Burwood-Taylor

This is the first in a series of articles about regenerative agriculture as an agri investment strategy that will appear in Agri Investor over the next few weeks. 

There is a growing movement among farmers and agriculture asset management firms to move away from conventional farming techniques and instead employ a range of practices that avoid the excessive use of fertilisers and other inputs that are slowly degrading the quality of soil globally.

This movement is widely known as ‘regenerative agriculture’ and not only involves scrapping artificial inputs but also, and perhaps more importantly, aims to restore the soil’s fertility by using other crops, such as legumes, or livestock.

At least four agriculture asset management firms use such techniques including SLM Partners, an Australia-based livestock fund management firm; Farmland LP, a diversified livestock and cropping fund manager in the US; Agro-Ecological, a New Zealand-based permanent crop and livestock investment manager; and Soil Capital, a start-up focusing on scaling regenerative agriculture projects across the livestock and cropping sectors.

Regenerative agriculture techniques also enable these investment managers to produce superior returns, according to Paul McMahon, managing partner at SLM Partners.

“Profitability in farming is driven not by high yields but by good margins – the difference between the price a farmer gets and the costs of production,” he told Agri Investor. “The bane of modern agriculture is high input costs, especially those linked to fossil fuels. Anything that can be done to minimise these costs will increase profitability.”

The improvement to the quality of the land can also enhance investor returns, in what some call an ‘ecological turnaround strategy’.

This land improvement creates another revenue stream for investors, according to Charles de Liedekerke, chief executive and founder of Soil Capital. “We believe that today, regenerative agriculture can be more profitable than the agro-industrial model for land managers, investors, and society at large,” he told Agri Investor.

“Farmers now have the ability to reduce their cost structure while maintaining or increasing yields and resilience to their land. This translates into better operational cash flows, but also into capital appreciation for the land.”

And for this reason, the decision to launch Soil Capital in 2013 was simple, he added.

“After meeting a number of farmers with profitable track records in regenerative farming, it became clear to us that we were beyond testing these concepts,” said de Liedekerke. “It is now a matter of scaling these in a way that works for both farmers and investors.”

There are many types of regenerative agriculture. Rotational grazing with large herds can restore degraded grasslands; using minimum tillage, cover crops and varied crop rotations can enhance the fertility of arable land; agro-forestry has been used to reverse soil erosion on fragile hillsides.

“If there is one common feature it is the emphasis on building soil organic matter,” said McMahon. “This magical substance improves soil structure, increases water absorption, and provides nutrients to plants. Soil organic matter could also provide a key to tackling climate change. It is essentially stored carbon, formed by sucking CO2 out of the air. The more CO2 locked away in the soil, the less CO2 in the atmosphere driving global warming.”

The environmental aspect should appeal to investors too, added McMahon.

“There is increasing pressure from regulators and consumers to limit the damaging environmental impacts of food production,” he said. “To reduce risk, investors will want to be sure they are backing the most environmentally benign approaches. Moreover, there may be an opportunity to monetise some of the benefits of regenerative agriculture, for example by getting paid for storing carbon in the soil.”

SLM Partners’ method of regenerative agriculture is to move large herds of beef cattle across huge tracts of degraded land in Australia in a way that aims to mimic their movement in wild as much as possible. The firm is currently fundraising for the SLM Australia Livestock Fund, which held a first close in 2012 on A$75 million.

This method is more commonly known as holistic planned grazing and was introduced by Alan Savory, a biologist and founder, of the Savory Institute in London. Savory has been responsible for reversing the signs of diversification across in several countries from Africa to Mexico.

The Savory Institute promotes large-scale restoration of the world’s grasslands through holistic management and is holding its annual international conference on Friday and Saturday this week.