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April 14, 2016

Ecological farming is a structure of interconnected agricultural operating principles. It works to minimize inputs, build soil health, recycle nutrients, support greater diversity within crops, animals and the environment, and reduce the environmental impact of farming while producing high value foods.  It encompasses a variety of labels including agro-ecology, organic, biodynamic, permaculture, regenerative agriculture, biological farming, conservation agriculture, ecoagriculture, and low input sustainable farming. Although it can often entail organic production, ecological farming does not necessarily mean certified organic. However, no matter the moniker, ecological agriculture is a growing movement that is positioned as an attractive alternative for agricultural investors.

Currently, there are seven investment managers managing a combined $500 million in assets pursuing these strategies who believe ecological farming presents a nascent investment opportunity that has the potential to generate returns that are comparable or indeed, exceed, those generated by industrial agriculture.

The rationale behind investment in this type of agricultural production system is outlined in the white paper, The Investment Case for Ecological Farming, recently published by one such investor, SLM Partners. The resource explains that ecological farming systems can deliver attractive risk-adjusted returns and offers seven reasons why investors should take interest. Take a sneak peak at these seven compelling reasons below:

Comparable or better yields – As is the case with organic farming systems, many investors are under the misconception that ecological farming operations will not be able to meet the yields that industrial farming is able to achieve, however, this is not the case. The integration of holistic planned grazing has been shown to increase the number of cattle and output volume of beef in cattle operations in Australia and the amount of available grass in sheep operations in Chile. The use of cover crops and livestock in no-till farming has been shown to increase crop yields, and European research has determined that agroforestry can increase output by 40%.

Impact of 15 agro-ecological practices on productivity

Chart 1

Source: N. Lampkin et al, The role of agroecology in sustainable intensification (2015)

Lower operational costs – Because ecological farming systems strive to reduce the use of inputs such as fertilizers, pesticides, fuel, and certain seeds, opting instead to use cover crops, crop rotation, organic composts, integrated pest management, and integrated ecosystem diversity, production costs can be significantly reduced while improving the environment.

For example, livestock producers can minimize input costs by making the most of the grass that grows on their land.

Relationship between production costs and utilization of grazed grass in Irish dairy

Chart 2

Source: Teagasc

Enhanced Natural Capital – A core objective of ecological farming is to enhance the natural capital on which agriculture depends: soil, biodiversity, water and ecosystem functionality. This should be appealing to long-term investors looking to safeguard and grow the value of their farmland assets.

There is also a massive opportunity to use regenerative agriculture to restore some of the 33% of the world’s land that is currently degraded. The economics are compelling. Degraded land is often abandoned, under-utilized and/or cheaply priced. The investment needed to restore land has a direct payback in the form of increased productivity and higher asset values. Building natural capital leads to greater financial capital. SLM Partners calls this an ‘ecological turnaround’ strategy.

Climate Resilience – Increasing organic matter in the soil raises its capacity to hold and retain moisture making it more resilient to climate change. High levels of soil organic matter comprised of stable organic material such as plant and animal residues and the biomass of living organisms enables soil to buffer acidity, store carbon, retain moisture, and cycle nutrients, making for healthier crops and livestock.

Positive externalities – and the chance to get paid for them – Ecological farming systems have the potential to generate positive outcomes beyond the farmgate. Healthier soil through ecological management lessens run-off and its negative environmental fallout. It can also bind greater amounts of nitrogen, phosphorus, and sediments, leading to reduced leaching.

Ecological production systems also reduce the need for the use of antibiotics in livestock operations, posing less of a threat to resistance in the human population, while creating a more diverse agro-ecosystem and a stronger genetic bank.

While good for the earth and society, it is also possible for growers and managers to gain revenue as a result of these improvements. As part of its cap and trade program, California is now paying $12 per ton of CO2e for offset credits and the Australian government’s Carbon Farming Initiative lets farmers earn carbon credits by reducing greenhouse gas emissions. An AU$2.5 billion Emissions Reduction Fund has been established by the government to purchase credits. Indeed, some the Australian properties managed by SLM Partners successfully bid to supply more than 2 million tons of CO2 credits to the fund over the coming decade, earning additional income for the properties involved.

Higher Value Markets– A further advantage of ecological farming is that it allows investors to tap into higher value markets and, in some cases, achieve premium pricing for their products. The most obvious market is for organic food, which is growing strongly. The value of the global organic market rose from $15 billion in 2000 to $72 billion in 2013. The great attraction of the organic market is the price premium available to farmers. Organic prices also tend to be more stable, buffering producers against the volatility of commodity markets.

‘Organic’ is just one category that consumers use to differentiate their food. There are a number of other certification schemes that try to reassure consumers about the provenance of their food, including ‘grass-fed’ or ‘pasture-raised’ beef and dairy and ‘antibiotic-free’ meat.

More Profitable Systems – Ultimately, the investment case for ecological farming comes down to economics. SLM Partners have collected dozens of case studies of farmers who have transformed their profitability – and easily surpassed local norms – after switching to ecological systems. As a result, they have achieved a much higher return on their land and their capital. These case studies cover agroforestry systems in the southeastern USA, low-input dairy in New Zealand, integrated crop and livestock systems on the northern American plains, rotational grazing systems in Patagonian Chile, and organic farming in many parts of the world.

The compiled data indicates that is possible to realize an internal rate of return of more than 10% within an ecological farming operation – even in developed countries, compared to an average rate of return within the single digits for conventional agricultural production