A five-part series on sustainability and the opportunities and challenges it presents farmers and agriculture.
Published: March 3, 2021
This Market Intel article is the first in a five-part series highlighting agricultural ecosystem credit markets and the opportunities and challenges they present farmers, as well as the policy levers and many other factors involved.
This article provides a primer on agriculture ecosystem credit markets. With so many emerging ideas and platforms, it’s important to explore how these markets are developing and operating, as well as who is behind them and why.
It seems like almost every month companies of various sizes across many industries are announcing new sustainability commitments, along with sustainability programs and markets that farmers and ranchers can participate in. Advancements in technology and increased capital have provided farmers more opportunities to generate additional revenue from participation in these markets. But with so many options and so many potential partners, it may be difficult for farmers to get all the information they need before signing a contract.
It’s important to note that these credit markets are constantly evolving, and many are still under development or being refined in pilot stages. Information provided here should be used as background information only; there is much more to explore, company-by-company and asset-by-asset, before making any decisions.
Regardless of the stage of development, there are a few common themes throughout all ecosystem credit markets; chief among them is they are all voluntary, incentive-based markets that connect buyers and sellers of ecosystem services credits. Typically, farmers are the sellers. They get paid for using animal and land management techniques proven to meet certain ecosystem benefit criteria. The most common target for these practices is carbon sequestration. Some common practices include cover crops, livestock grazing, crop rotation, no-till/ strip-till, anaerobic digesters, nutrient management, buffer strips, tree establishment, etc. As outlined in a contract, participating farmers opt into some version of data monitoring and measurement procedures. Once enrolled, farmers and ranchers will typically be paid based on measured outcomes, either on a per-acre basis or by asset generated.
Once an ecosystem asset is quantified and verified, it can be made available for purchase via the market. Credit buyers, like corporations looking to meet sustainability goals and compliance standards, can purchase those credits.
The American Farm Bureau has been very vocal about the markets remaining voluntary and economically viable for farmers and ranchers. Also a priority is that they go sensibly hand-in-hand with climate-smart practices in place on the farm.
The figure below shows how agricultural ecosystem credit markets could potentially operate.
Ecosystem credit markets are market platforms being developed to help farmers and ranchers generate agricultural ecosystem assets. The most common asset is carbon, but there are also efforts to quantify net greenhouse gas credits, water quality credits, water quantity credits, other soil nutrient credits and more. These credits are attracting corporate buyers like General Mills, Nestle and McDonald’s, as well as agribusinesses like Cargill, Syngenta and Corteva and even government entities. Farmers and ranchers are being compensated for a generated asset in different ways, including cash payments or input credit discounts.
From public to nonprofit to private, there are already several markets in various stages of development that allow farmers and ranchers to generate agriculture ecosystem credits and sell them to a variety of buyers.
Public markets include those called for by the Food and Agriculture Climate Alliance to establish a USDA-led Commodity Credit Corporation carbon bank. There is also the Growing Climate Solutions Act; Introduced in the 116th Congress by Indiana Sen. Mike Braun and Michigan Sen. Debbie Stabenow, the bill called for a certification program at USDA to help farmer and forest landowners participate in carbon credit markets. There is likely to be another version of that public legislation introduced during the 117th Congress.
On track to be the largest credit exchange platform in the U.S. when it launches in 2022, the Ecosystem Services Market Consortium is an example of a nonprofit platform. Private markets have been launched by companies including Indigo Ag Carbon, Nori and Farmers Business Network. Private agribusinesses that have developed carbon market programs include Bayer and Nutrien.
Markets are at different stages of operation and development, with some already enrolling farmers and ranchers into programs with committed acres and others operating pilot projects on specific crop and grazing systems to research scientific methods of quantifying assets.
Many market developers still in the early stages are looking for farmer and rancher partners. Some companies are developing protocols for working agricultural lands that will go on to be reviewed and certified by third-party verifiers. This could be particularly important in establishing widely accepted standards for agricultural ecosystem asset credits. A significant amount of research is being done to quantify and verify the assets to ensure they hold value for buyers. Much of that research testing and refinement is being done through pilot projects in cropping systems across the U.S.
There are many reasons companies and organizations are jumping into the development of these markets. As previously mentioned, the number one theme is the voluntary, incentive-based structure that comes with launching independent markets. While the markets vary in shape and size, as well as stages of development, a common driver for their development is to foster healthy soils and ecosystems and reduce emissions. Many of the corporations involved are focusing on the public goodwill they’ll earn as consumers see them as playing a part in improving conservation and biodiversity, as well as pollinator/wildlife habitats.
The markets also provide diversified revenue potential for farmers and ranchers who want to participate in them. However, before any contracts are signed, farmers and ranchers should consult their trusted advisors to determine if enrolling in a market is truly the best thing for their farm.
Published: March 9, 2021
This Market Intel article is the second in a five-part series highlighting agricultural ecosystem credit markets and the opportunities and challenges they present farmers, as well as the policy levers and many other factors involved. The first article, Sustainability Markets, Part 1: Agricultural Ecosystem Credit Markets – The Primer, provided a primer on agricultural ecosystem credit markets, how the markets are developing and operating and who is behind them and why.
This Market Intel article discusses some of the Natural Resources Conservation Service’s conservation practices commonly utilized in agricultural ecosystem credit market contracts and their current adoption rates.
These NRCS conservation practices are used to improve soil health, reduce soil erosion, improve water quality and provide other natural resource benefits.
To maintain basic soil health, NRCS calls on farmers to keep the soil covered, disturb the soil minimally, keep a living cover that feeds the soil throughout the year, diversify crop systems on the soil through crop rotations and cover crops and incorporate livestock into the cropping system. Many of these practices contribute to carbon sequestration, as well as nutrient reduction and water quality/water quantity improvements.
Cover Crops and Livestock Grazing
Cover crops like grasses, legumes and forbs can provide conservation cover if planted before grain crops are harvested or immediately after harvest. Depending on the cover crop mix planted, cover crops can reduce soil erosion and trap and sequester nutrients, like carbon, in the soil. Cover crops have also been used to improve soil biology, reduce weed competition, improve water infiltration and increase organic matter in soil. Cover crops are especially helpful when incorporating livestock grazing into a cropping system, providing an added nutrition source.
NRCS has Field Office Technical Guides for each state. The localized guides are scientific references containing technical information about conservation, including cover crops.
Beyond the market incentives, reasons for planting different crops each year include improved soil health and enhanced biological diversity. In addition, crop rotation can reduce soil erosion and reduce pesticide costs, while also improving water quality. If a farmer incorporates a rotation of alfalfa and other legumes, there are fertilizer reduction benefits, as well.
No-till/ Strip-till/ Conservation Tillage
Soil compaction is a constant challenge for farmers post-harvest and moving into the following year’s planting, but limiting disturbances to the soil improves carbon retention and minimizes carbon emissions from soils. Avoiding full-width tillage, regardless of the depth or timing, if done long-term, can add organic matter to the soil as it decomposes and help to reduce soil compaction. Avoiding full-width tillage reduces soil erosion and protects water quality since the soil is not disrupted and can help keep water available for plants into the growing season after planting. Overall, the reduction in soil disturbance creates fewer inputs ahead of planting the crop.
An anaerobic digester takes organic matter, such as livestock manure, and breaks it down to produce biogas and biofertilizer. When captured, the biogas reduces methane and greenhouse gas emissions that would be released into the atmosphere otherwise. By capturing the biogas, it can also be used to generate electricity or used as a natural gas energy stream, which is a renewable energy source.
Management of the solid and liquid waste streams that enter an anaerobic digester can further maximize the digester’s efficiency and make available more methane for capture and combustion.
Precisely managing – through precision technology, for example — the source, rate, timing and placement of nutrients like nitrogen or animal manure as fertilizer can reduce the potential for waste or runoff of plant nutrients, which can improve soil conditions and overall crop production, prevent excess nitrogen runoff and reduce input costs. Think the 4R’s: right source, right rate, right time and right place can help keep nutrients on and in the field.
These strips of grass, mixed grasses and legumes run along the contour of a farmed field to create a “buffer.” Buffer strips made up of native plants and grasses remove sediment, nutrients and pesticides as they pass through, all while helping reduce soil erosion. Buffer strips can also provide habitats for pollinators and other beneficial insects.
Adding compatible trees and shrubs to pastureland or around livestock buildings and establishing woody plants could reduce soil erosion and improve air and water quality. Additional trees and shrubs provide wildlife habitat that can also store carbon and be used as biomass for energy.
Adoption of Conservation Practices
Available data regarding conservation adoption and the practices used on farms is limited due to the privacy of individual farmers and the limited resources USDA has for conducting surveys. Taken only once every five years, the 2017 USDA Census of Agriculture is a survey-based count of U.S. farms and ranches and the people who operate them. The survey looks at land use and ownership, operator characteristics, production practices, income and expenditures. The Census of Agriculture provides the most recent data regarding land use practices by the number of farms and the number of acres. In 2017, there were over 900 million acres in farmland. Of the 900 million acres, 366 million acres, or 41 %, used tile and water management, conservation easement, no-till conservation, conservation tillage, conventional tillage or cover crops, which is an increase of 3% from the number of acres utilizing these practices in 2012. Figure 1 displays the percent of cropland acres utilizing each of the surveyed land-use conservation practices.
When compared to 2012 when the Census of Agriculture was previously published, the land-use practices aligned with the NRCS conservation practices that improve soil health, reduce soil erosion, improve water quality and provide other natural resource benefits increased in adoption. Conventional tillage was reduced by 24% from 2012 to 2017, while no-till conservation and conservation tillage increased by 8% and 28%, respectively. Cover crops increased by 50%. Figure 2 shows the percent change of U.S. cropland acres utilizing certain land-use practices from 2012 to 2017.
While NRCS has resources and information related to conservation practices used to improve soil health, reduce soil erosion, improve water quality and provide other natural resource benefits, adoption rates on U.S. cropland have been limited due to a variety of barriers. This Market Intel series will analyze those barriers in the fourth article. Though adoption rates may be low, the most recent data shows the pace in which farms have adopted conservation practices has increased, indicating many farms have been able to implement some version of conservation on their acres.
Published: March 17, 2021
This Market Intel article considers some of the barriers to participate in agriculture ecosystem credit markets that farmers and ranchers could face. Making any kind of change on a farm or ranch creates some kind of cost. Some of those costs are explicit, cash expenses, while others are trade-offs that force a farmer or rancher to give up something in order to participate. All barriers to participation carry risk that weighs differently from farm to farm. More risk-averse farmers may require more tools and support to participate, while those with the financial footing to be riskier could participate with less concern. Every farm and ranch is different, which makes it difficult to estimate how conservation practice adoption will impact the ultimate profit of a farm or ranch.
Explicit Cash Expenses
Explicit cash expense barriers associated with adopting conservation practices come in the form of input costs, variable costs and fixed costs. Input costs include operating costs that require upfront purchases necessary to begin production. These are items such as fertilizer, pesticides, seeds, weaned animals, feed and any other production input. Variable costs are costs that will change depending on the amount of intended production on a farm or ranch and include items like fuel and oil, electricity, labor (hired and custom), repairs and maintenance, water use and storage. Fixed costs are costs that must be paid but are not dependent on the level of production. These include operator labor, machinery, soil testing, taxes, asset depreciation/capital consumption, rent and interest expenses.
When USDA estimates net cash income, cash expenses include feed purchased, labor expenses, livestock and poultry, fertilizer and lime, crop seed, net rent to landlords, pesticides, property taxes and fees, fuel and oil, interest on real estate and non-real estate, electricity and other intermediate expenses. Those “other intermediate expenses” are the largest category of expenses and tend to be the most difficult to budget for considering they are usually unexpected costs. For example, while you can expect bumps along the way during harvest, it is difficult to estimate and budget for the combine to have a breakdown in the middle of the field and know what the maintenance and repair costs plus labor will be. The “other intermediate expenses” category includes items like machine hire and custom work, marketing/ storage/ transportation of commodities, repair and maintenance, insurance premiums, irrigation and miscellaneous expenses associated with running a farm.
Figure 1 displays USDA-Economic Research Service’s estimates of farm cash expenses, excluding expenses that occur on the operator’s dwelling and landlord capital consumption.
A change to a farm or ranch operation could increase costs associated with the operation, depending on the conservation practice adopted. For example, as reported by farmers experimenting with conservation cropping systems, in a no-till cropping system, expenses spent on machinery and hired labor may be saved — $10 to $12 per acre and $4 to $15 per acre, respectively — but more money would be spent on chemicals used to manage weeds that have taken root — typically $7 to $12 per acre. In a cover crop system, farmers have said increased expenses come in the form of cover crop seed purchases, typically $8 to $15 per acre depending on the mix, and the overall cost to actually plant the cover crop, which would include fuel, labor and any unexpected costs incurred, between $5 to $15 per acre, bringing the total cover crop investment up to $30 per acre. But according to research studies, up to $5 to $14 per acre could be saved in fertilizer or herbicide crop chemicals. The overall investment is more than the return in savings, thus providing some kind of cost-sharing to help offset upfront additional costs could help promote widespread adoption.
These costs are based on how the market and the farm operate today. However, looking down the road, there could be unexpected financial costs that have not been considered. Many of the costs associated with conservation practices are also priced based on market conditions. If cover crop demand increases at current supply levels, there could be an unexpected price increase for cover crop seed. Farming is also very dependent on the weather. Events commonly called “acts-of-God-events” could disturb the soil, or even overall farm operations, and potentially decrease the amount of carbon sequestered or unexpectedly worsen the water quality. This would lower the price a farmer or rancher could expect for the credits they were working to generate for purchase and would not return the revenues expected for participating in an agriculture ecosystem credit market. A risk management tool that can protect the financial investments made annually to participate in these markets and mitigate the risk in the event of an “act-of-God” weather occurrence may encourage more farmers and ranchers to participate.
Figure 2 shows USDA’s forecast of 2021 farm cash expenses by type, with “other intermediate expenses” as the largest cash expense in 2021.
Examples of Trade-off Barriers
Increased costs and financial barriers are not the only concerns farmers and ranchers have about participating in an agricultural ecosystem credit market, as indicated by most anecdotal and peer-reviewed research reports. There are some non-financial trade-offs, though some may have financial impacts. The first is the labor trade-off. While labor may be a lower upfront cost on some farms and ranches or is even just a single person’s income, there is a labor trade-off for conservation practice adoption. Especially during seasonally busy times, such as planting and harvesting, operators have set plans to ensure the necessary work gets done in a timely fashion. Many conservation practices, even those that may be low-cost to implement, simply can’t be accomplished because there aren’t enough people to get the job done or enough money to hire a worker or workers to do it.
Another trade-off is the time required to gain the knowledge to implement some conservation practices, like getting the cover crop mix just right or learning when certain steps of the land conversion need to happen. With that, there is a time trade-off waiting for the benefits of the practice to occur. The available research promotes the benefits of conservation practices but acknowledges the benefits happen over time, not necessarily in the short-term.
There are trade-offs of time, money and expertise consulting with a lawyer when considering whether or not to enroll in an agricultural ecosystem credit market. With the contracts, there is a trade-off of relinquishing some amount of farm data in order to quantify the assets being generated on the farm and put them into a credit. And with all of that, there is a trade-off of time and relationships in securing authority from all the associated parties with an ownership interest of the soil and practices involved. When evaluating whether or not to participate in an agricultural ecosystem credit market, farmers are not only considering the financial barriers but also trade-off barriers.
A market’s credibility comes from its ability to quantify and verify that the asset generated is legitimate. Many market-operators are relying on third-party verification systems to add a layer of credibility to their market. Regardless of how verification occurs, the bottom line is that verification will be an added cost to market participation. The question becomes, who bears the cost of verification?
In the ecosystem credit market space, “additionality” is defined as generating an ecosystem service above what would normally be occurring to determine whether the action has an actual effect compared to the baseline. Additionality barriers come at the rate of practice adoption and at what magnitude adoption occurs and the baseline for measuring adoption benefits.
The rate of adoption and the magnitude of adoption on a farm, or even in a region, can be an impact of additionality. Does the variety of practices adopted in a region increase the benefits over time or can every farm or ranch in an area adopt almost all the same practices? Is there a diminishing marginal return on benefits based on practices? Does a farm or ranch have to add practices to their current system even if they are already incorporating conservation on the farm or ranch?
The last question leads to the barrier of how to establish a baseline. When does the baseline start? Does it begin at the time of sign-up? But what if the farm or ranch is an early-adopter (see below)? Can a baseline be established retroactively? At what point does the market need to start its measuring before it can quantify the assets generated?
For decades, farmers and ranchers have been leading the way in promoting soil health, conserving water, enhancing wildlife, efficiently using nutrients and caring for their animals. As illustrated in part two of this series on conservation adoption (i.e., Common Land-Use Practices Under Consideration for Conservation Adoption), a large number of farmers and ranchers have already adopted conservation practices with the goals of improving productivity, providing clean and renewable energy, and enhancing sustainability. In fact, 15% of all farmland is already used for conservation and wildlife habitat. U.S. farmers have enrolled over 140 million acres in certain USDA conservation programs, equal to the total land area of California and New York combined. The 140 million acres does not include the additional millions of acres already enrolled in voluntary or state-led conservation initiatives.
The conservation work already being done by farmers and ranchers should not be discounted just because the progression of technology and market development have rapidly increased. Finding solutions to allow early-adopters to receive equitable benefits of participating in ecosystem credit markets will be important in establishing markets.
Because of the variety of farms and ranches (i.e., soil types, cropping systems, climate, etc.), there are many ways to adopt and apply conservation practices. Innovative research and precision technology have evolved to help make this easier. Systems for getting farm data inputted, analyzed and responsive are ever-improving. For farmers and ranchers to utilize these supportive technologies, and even participate in ecosystem credit market platforms, rural broadband and on-demand applications must be significantly upgraded.
Many barriers make it difficult for farmers and ranchers to participate in agriculture ecosystem credit markets. Growing a crop or raising livestock requires significant cash to cover the associated expenses. However financial barriers are not the only hurdle to participation. Trade-off barriers such as labor availability, education, legal advice, verification costs, additionality requirements, being an early-adopter, and lack of quality broadband can prevent farmers and ranchers from being able to participate in these markets. While making any kind of change is costly, change also carries various amounts of risk. Some farms are able to extend their risk tolerance to participate, while others may not have the resources, financial or otherwise. While this list may not cover every obstacle a farmer may face trying to participate in an ag ecosystem credit market, the barriers detailed here and others need to be resolved by market-operators or policymakers to encourage broader participation for farmers and ranchers who voluntarily want to participate in these markets.
Published: March 24, 2021
A challenge of agricultural ecosystem credit markets is quantifying the generated assets in a streamlined and cost-efficient manner. After that hurdle is overcome, the next question is how are these assets priced?
How much is an asset worth? An agricultural ecosystem credit can be priced in several ways depending on the type of business that is operating the market. Among current private market-operators, payments are coming in the form of a per-acre cash payment or a per-metric-ton payment. Farmers can either be paid for the practice implemented or be paid based on outcomes. Payments range from 30 cents per acre for research to $3 per acre for a specific practice to $10 per acre for general enrollment or $10 per carbon credit to $15 per credit. These are early estimates and many companies have not publicly announced their pricing proposals. A common question is whether a credit, a sequestered unit of carbon in this scenario, is considered a commodity. And if it is, how does that change the outlook of the carbon market?
A commodity is defined as “an economic good: such as a product of agriculture or mining; an article of commerce especially when delivered for shipment; a mass-produced unspecialized product.” If carbon is considered a commodity, it would need to meet the basic qualification that there is little differentiation between carbon sequestered by one farm and carbon sequestered at another farm. For that to be the case, market-operators and buyers would need to agree that the conservation practices implemented in an agricultural ecosystem credit market program produce the same benefit in an equitable amount, regardless of type of farm or ranch, conservation practice implemented, size of implementation or scope of implementation.
For this discussion, if carbon is to be considered a commodity, two risks need to be addressed. The first is the risk of over-supply. If the number of buyers demanding asset credits is held constant and there is an over-supply of credits due to a large number of farmers and ranchers generating assets, the price per ton of a credit will fall. Farmers may look to store credits until prices rise, but there is little information about how long a credit holds value and how the buyers’ willingness to pay would change if they are asked to pay for credits with benefits that occurred in the past. If low prices are not resolved, the low price will discourage farmers and ranchers from participating in the agricultural ecosystem credit market and fewer participants will find it economically viable to continue participating. If the goal of a market is broad participation, the economic viability of the farm participating will need to be maintained to keep participants from stepping away from the market.
The second risk that needs to be addressed is the price received by the farmer for generating the asset. In a commodity market, every farmer receives the same price for the same commodity as determined by the market it is trading on. Localized prices may differ due to basis risk when the local cash price differs from the futures price in the market, or a price differential may be applied due to the quality of the commodity sold at the elevator. The buyer of the commodity pays that same price to acquire the commodity in bulk before it moves on to the next step in the value-added process. The value-added process takes the raw commodity and turns it into food.
Through its food dollar series, USDA’s Economic Research Service tracks expenditures on each of the various food commodities sold in proportions that represent their share of the annual sales in the U.S. food market. The information is broken down to the share of the food dollar by the input-components used to make it. ERS tracks the contributions of 12 industry groups in their role to bring food to the market. The 12 groups are agribusiness, farm production, food processing, packaging, transportation, wholesale trade, retail trade, food service, energy, finance and insurance, advertising and legal and accounting.
For the 2019 calendar year, the farm production value in the value-added food dollar was 7.6 cents. Agribusiness was 2 cents of the food dollar. Food processing represented 14.7 cents of the food dollar, while packaging represented 2.3 cents. Transportation was 3.4 cents of the food dollar. Wholesale trade represented 8.4 cents and retail trade was 12.1 cents. The food services portion of the value-added food dollar was the largest portion, representing 38.5 cents. Energy was 4.1 cents, with finance and insurance representing 3 cents and advertising at 2.6 cents. Legal and accounting’s share of the food dollar was 1.3 cents. Figure 1 compiles USDA’s value-added food dollar for 2019.
The food dollar example speaks to the share of a purchased commodity’s price that comes back to the farmer. If carbon is treated as a commodity, what share of the purchased carbon credit will come back to the farmer? The input costs and technical assistance consume a portion of the farm production revenue generated for producing a credit. After a carbon credit is produced, we know there are costs associated with verification (i.e., Part 3: Barriers to Participation in Ag Ecosystem Credit Markets). The accounting system required to track and maintain credits in a market, as well as the prevention of double-counting credits across markets, will require an added fee. Not to mention that market-operators could require transaction fees and/or enrollment fees to keep the market staffed and to maintain the infrastructure needed to keep the market operating. There may be wholesale and retail trade that occurs after a credit leaves the farm that would lessen the share returned to farmers. Finance and insurance services, advertising and marketing services, and legal services could decrease farmers’ share of the carbon dollar. The farm production share of the carbon dollar could quickly diminish in the process of generating a carbon asset credit for market purchase the same way the farm production share of the food dollar has decreased with the added costs of bringing the commodity to market. Figure 2 shows potentially how a carbon credit dollar could be portioned out on a percent basis.
Ultimately, in private markets, the price of an ecosystem credit will be determined by the market-operator. A farmer or rancher can expect to be paid for some portion of the cost it takes to generate the agricultural ecosystem credit, which may or may not include costs like soil sampling and quantification methods, while the buyers could be more likely to bear additional costs for operating the market, such as third-party verification. There are some market risks that could impact the price farmers receive for generating an agricultural ecosystem credit. There is the risk of an over-supply of credits, which could drive down the price farmers receive for generating agricultural ecosystem credits. There is also the risk of a diminishing farm production share of the carbon dollar, similar to the farm production share of 7.6 cents of the food dollar. The market-operator has the final decision on how it structures its operations, which in turn will determine the pricing strategy.
Published: April 27, 2021
This Market Intel article, the last in the series, looks at the development of good business practices for agriculture ecosystem credit markets and assesses the markets’ long-term impacts.
This Market Intel article should not be taken as legal advice.
Soil Carbon Contracts
Enrollment in any ecosystem credit market is a contractual agreement between the farmer or rancher and other market participants. These contracts generally commit the farm or ranch to conservation practices in exchange for payments or credits for ecosystem services or “natural climate solutions.” This article focuses on renewed interest in rewarding farm practices that increase carbon stock in soils, although various other markets are paying farmers and landowners for ecosystem benefits such as capturing methane from manure digesters or sustainable forest management.
The creation of carbon credit markets is being driven largely by two factors: government mandates to reduce greenhouse gas emissions, as in California, and pledges by private companies, like McDonald’s and other household brand names, to offset their own greenhouse gas emissions. This creates a demand for carbon credits, which are certifications that carbon dioxide has been removed from the air through climate-smart farming practices that store carbon in soil, plants and trees. Such practices include no-till, precision fertilizer application and cover crops. The carbon reductions are usually verified by a certification organization as a marketable carbon credit that can be bought and sold, just like any other agricultural commodity. Because carbon markets are part of a larger ecosystem services market, farmers and ranchers may be able to “stack” credits for habitat preservation, water quality improvements and other environmental benefits.
When a farmer or rancher sells a carbon credit, they essentially sell the rights to claim that carbon reduction to another person. The farm operator must also share certain farm data that supports the quantity of stored carbon, although there are ways to protect business-sensitive information. Where land is leased or contracted, the landowner and lessee should agree on how carbon rights will be allocated, and how climate-smart practices can be continued if the lease term is shorter than the duration of the carbon project.
For over a decade, carbon credits have been issued by nonprofit certification organizations under protocols that define which climate-smart practices qualify and how to measure carbon reductions. More recently, electronic marketplace platforms are issuing their own brand of carbon credits and providing online matchmaking services to bring sellers and buyers together, usually for a fee. Some large agricultural supply companies are developing carbon programs to assist farmers with monetizing carbon along with other farm products. These various market opportunities all come with different contracts with varying terms and conditions.
Farmers and ranchers can set up their own carbon projects or work with middlemen (sometimes called aggregators) that provide financing (for example, advance payments for no-till equipment) and buy the carbon credits from the farm or ranch to sell to their own customers. Consultants are also available to share know-how for getting carbon credits approved. Because there is currently no standardized market for carbon, farmers might be approached by a variety of carbon programs, middlemen and consultants with different arrangements. Somewhat surprisingly, there is no standardized definition of what a carbon credit actually is. Some carbon programs will issue carbon credits in exchange for a commitment to continue climate-smart practices for as little as 10 years using “best efforts” to store carbon. Other programs require a 100-year commitment to guarantee permanent carbon storage. Some carbon programs require actual soil sampling, while others will issue carbon credits based on modeling. The amount of carbon credited for particular farm practices varies by carbon programs as well. The extensive differences in in how carbon reductions are defined and measured will likely result in a wide range of prices per ton of carbon in different markets.
At this point, there is no universal price for farm-stored carbon. The carbon market is driven largely by sustainability pledges made by well-recognized brand-name companies, so pricing is heavily influenced by the type of credit the buyer wants. Currently, prices for agriculture carbon typically range from $10-$20 per ton or per acre, but the devil is in the details. As any farmer knows, commodity prices are not the whole story. Net profitability of farm carbon is a function of the price of carbon, the cost of implementing carbon-friendly practices on the farm, any loss of productivity, data costs associated with measuring carbon improvements, and fees charged by project partners, brokers and sales platforms. Typically, the farmer or rancher must arrange for soil testing and verification of conservation practices on an annual basis, and the project economics must account for this ongoing cost. Also, discontinuing practices or changing land use might result in forfeiting credits or paying a penalty, depending on the carbon program and sales terms. Usually, these costs are negotiated with project partners. Typically a project partner or broker will handle marketing and sale of the credits to third-party buyers.
Carbon markets will continue to evolve as an increased focus on climate policy and corporate sustainability commitments drive demand for natural climate solutions.
Data Ownership and Privacy
AFBF policy supports farmers owning the information generated on their farming operations. With that said, in order to verify compliance, ecosystem credit markets require data collection, monitoring and sharing with the market-operator. Essential data ownership and privacy principles include:
- Contracts should explicitly identify all data that will be generated and shared.
- Contracts should identify the purposes for any data collection, who will receive the data, and whether the farmer can limit the use and disclosure of information.
- Contracts should not require sharing more information than necessary to execute the market operation. Any information shared should be kept private to the maximum extent possible.
If the government becomes a collector of farm-level data, the farmer’s information should be protected from being disclosed pursuant to Freedom of Information Act requests.
In 2014, the American Farm Bureau Federation and other commodity groups, farm organizations and agriculture technology providers created a set of “Core Principles” that ag tech providers should follow when collecting, using, storing and transferring farmers’ data.
The “Core Principles” are: education; ownership; collection, access and control; notice; transparency and consistency; choice; portability; terms and definitions; disclosure, use and sale limitations; data retention and availability; contract termination; unlawful or anti-competitive activities; and liability and security safeguards.
The Ag Data Transparency Evaluator resource audits companies’ agricultural data contracts so farmers have a better understanding about their company partners. The Ag Data Transparent seal is used to recognize companies that opted to have their contracts reviewed against these core principles for transparency purposes.
While this resource is helpful in providing some transparency for farmer-partner contracts, it is very important that farmers do their own due diligence. This resource can be helpful to evaluate companies’ contracts for transparency purposes but does not indicate whether or not the contract is good for farmers. These kinds of agreements are new to agriculture and require a thorough review and careful analysis of the potential impacts.
Ecosystem Credit Markets in the Long-Run
As with any start-up company, there is always a risk of business failure. Contracts should specify a farmer’s continuing obligations if the market-operator fails while the farmer is still enrolled. In addition, for this emerging market, contingency plans that provide risk management tools for farmers and ranchers and the assets they generated should be developed in the event a market fails.
The value companies and consumers place on sustainability, as well as their respective willingness to pay, has yet to be accurately estimated. Future research should attempt to infer consumers’ willingness to pay for goods given the fact that these credits will cost additional money to produce.
Increased investment in technology and the advancements that have come with it have reintroduced opportunities for farmers and ranchers who want to voluntarily participate in ecosystem credit markets and potentially earn additional revenue. Companies of various sizes across numerous industries are making sustainability commitments that are priming them to become buyers in an ecosystem credit market. The many potential market-operators farmers and ranchers could contract with are developing different pricing models and market structures. Farmers and ranchers have unique barriers of entry, most of which are related to their risk tolerance. If participating in a credit market is the right decision for them, there are still some points of caution.
Bottom line: these markets are developing and evolving at a rapid pace. Farmers and ranchers should gather as much information as possible in deciding whether or not to participate. That is why it is important participation in these markets remains voluntary, with incentives that encourage conservation practice adoption, rather than hinder it. If it looks like a good fit, the farmer or rancher will make the necessary trade-offs to take advantage of the opportunity.
AFBF Market Intel wishes to thank Max Williamson of Williamson Law + Policy for providing insights into carbon markets and climate finance that were incorporated into this installment. This Market Intel article should not be taken as legal advice.