This post is part of Gus Renzin’s 2024 Lazarus Summer Internship.
It took me about five minutes to decide what I wanted my independent project this summer to focus on. Regenerative agriculture is just that awesome. Although no one single definition for it exists—some organizations classify a farm as regenerative based on practices (eg. cover cropping, no-till, mulching), others based on the outcomes (like raising soil organic matter levels, reducing runoff, and improving working conditions), and still others based on embracing certain foundational principles such maintaining living roots and welcoming animals—the bottom line is this: regenerative agriculture is all about farming in ways that leave land healthier than we found it. Farms practicing regenerative agriculture sequester more carbon, are more resilient to climate change and extreme weather events, and are more ecologically beneficial than conventional farms.
Given the numerous advantages that regenerative agriculture offers, I was surprised by the fact that less than 2% of US farms are regenerative. My immediate assumption was that the environmental benefits of regenerative agriculture must come at a financial cost, but nearly every report I read on the subject seemed to point in the opposite direction: studies by the Soil Health Institute and the American Farmland Trust used partial budget analysis methods to demonstrate that—even without upping prices or taking advantage of burgeoning ecosystem service and carbon markets—regenerative farms are, on average, significantly more profitable than they would be if operated conventionally. Regenerative farmers are rewarded for their focus on soil health with reduced dependence on expensive inputs like fertilizer, herbicides, and pesticides, and as a result, wider margins.
The major roadblock to widespread adoption of regenerative agriculture, I've come to learn, is the period of depressed profitability that occurs as farmers transition from conventional to regenerative agriculture. Quite simply, it takes time for the land (and the farmer) to adjust to a new way of doing things, and in the interim, yields can suffer and costs can rise. According to studies by BCG and the World Business Council for Sustainable Development, Bain and the World Economic Forum, and the Environmental Defense Fund, farmers must often weather several years of significant losses before hitting original and then increased levels of profitability.
Learning this was the impetus for my independent project this summer. I decided to treat the transition to regenerative as an investment, model farm-level cash flows over time, and ultimately analyze the financial viability of the transition through a capital budgeting lens. I began by compiling data from the Soil Health's Institute's study, ECONOMICS of Soil Health Systems on 30 U.S. Farms, which used partial budget analysis to compare per-acre profitability of 30 existing regenerative farms to projected levels of profitability if they were to be operated conventionally. Using the projected levels of conventional profitability as a baseline, I used excel to create this interactive tool to model a 6 year transition to regenerative agriculture for each farm that ultimately results in each farm achieving its actual level of profitability as a regenerative farm and maintaining those levels (adjusted annually for projected inflation) in subsequent years. The tool allows the user to choose the discount rate, average rate of inflation, interest rate, and one of eight options for projected transition losses based on scenarios proposed in "100 Million Farmers: Breakthrough Models for Financing a Sustainability Transition" and "Cultivating Farmer Prosperity: Investing in Regenerative Agriculture" and see the 12, 20, and 100 year IRR and NPV for each farm transition as well as the amount of time it would take for the farmer to repay a loan that would cover transition losses (which is one type of arrangement that innovative new financial firms in the regenerative agriculture space are using to support farmers through the transition). In addition to demonstrating which transitions are ultimately sound investments, the tool can help viewers to visualize the enormous economic potential of the regenerative transition as well as the risks that it poses, even for farms that are—from an operational and ecological standpoint—successful.
Overall, working on my independent project this summer has been an incredible experience. I've learned more about regenerative agriculture, financial modeling, and the workings of Microsoft Excel than I could have hoped. The most important thing I've learned, though, is how much must be done before a widespread transition to regenerative agriculture is viable. The work done by organizations like the Soil Health Institute, the American Farmland Trust, Bain, BCG, and the Environmental Defense Fund is incredible, and they shed light on the enormous financial and environmental potential of regenerative agriculture. But they—and by extension my tool—are nowhere near comprehensive enough to give farmers or financial institutions the information they need to confidently embrace the regenerative transition. The read-world data required to create accurate models just isn't there yet.
For widespread adoption of regenerative practices to be viable, farmers need reliable tools that can accurately predict how regenerative transitions will impact both their land and their bank accounts, and financial institutions need to deeply understand the risks and rewards that they expose themselves to in supporting those farmers. The need for far greater real-world data collection is clear, but as more and more information about the financial implications of actual transitions—not just projections—comes to light, I have no doubt that farmers and investors alike will confidently embrace regenerative agriculture.