Because multi-year agreements help to provide assurance for major capital investment, they present an opportunity for advancing more sustainable agricultural practices.
Pipeline Foods offers 10-year offtake agreements to farmers using organic practices, and Bunge Limited uses 10-year loans to secure zero-deforestation soy crops.
Bunge Limited, the largest agricultural exporter in Brazil, has begun to provide 10-year loans to farmers willing to commit to producing soy “without further deforestation or conversion of native vegetation.”
As food companies look to lower supply chain risk and reduce their ecological footprint, new strategies are emerging to increase adoption of sustainability practices among farmers. Several companies have begun using long-term contracts — purchase agreements guaranteeing offtake beyond an annual time horizon — to stabilize costs and allow both grower and buyer to plan further into the future. Because multi-year agreements help to provide assurance for major capital investment, they present an opportunity for advancing more sustainable agricultural practices and conservation benefits.
The Power of a Guarantee
One area where sustainable agriculture has struggled is the growth of organic grain production. Despite potential environmental and financial advantages, organic agriculture has historically faced challenges in adoption. Research from sources including California Certified Organic Farmers and the Sustainable Food Lab highlights barriers from lack of technical expertise to high upfront costs and uncertain returns. Additionally, the three-year transition period required to achieve organic certification in the United States requires the ability to plan beyond a year-to-year land lease.
Pipeline Foods was founded in 2017 with the aim of lowering these barriers and bridging the supply gap for organic grains within the United States. In 2018 the company launched its Farm Profit Program, through which growers can enroll a set acreage into a 10-year master agreement. Under the agreement, Pipeline commits to purchasing the organic crops yielded from the enrolled land. Each winter Pipeline sits down with participating farmers to discuss specific planting schedules and market opportunities, and set purchase prices for the year ahead. In its first year, the Farm Profit Program contracted five farmers and began negotiations with approximately two dozen others.
Erin Heitkamp, senior vice president of agriculture and public affairs, oversees the Farm Profit Program at Pipeline. According to Heitkamp, there are two main drivers for farmer adoption of this model.
For some, the partnership provides important structure for funding an initial land transition from conventional to organic agriculture.
“There’s a lot of anxiety and uncertainty about it, because there’s still not a lot understood by the farming community and the average farmer about organic production … it’s one way to de-risk the whole concept and experience,” said Heitkamp.
Since Pipeline can provide technical resources and a secured market, their contracts aim to ease the transition process while protecting a farmer’s initial investment against organic price volatility.
Another common scenario is growers — many of whom already practice some organic agriculture — looking to transition large acreage but facing significant out-of-pocket costs. According to Heitkamp, this was the motivation for the program’s first two enrollees: both found that banks were unwilling to finance through the organic transition without a committed buyer.
“In order for their bank to get on board they want to see that the buyer is contractually obligated to be there,” said Heitkamp. Farmers with a guarantee of offtake pose less of a financial risk, and consequently can approach banks with the backing of stronger credit.
Targeting Conservation Outcomes
Beyond providing a pathway for organic agriculture transitions, long-term contracts can be leveraged toward other environmental benefits.
Bunge Limited, the largest agricultural exporter in Brazil, has also begun using long-term contracts as a mechanism for reducing deforestation in its soybean supply chain. In 2018 the company announced a partnership with Santander and The Nature Conservancy to provide 10-year loans to farmers willing to commit to producing soy “without further deforestation or conversion of native vegetation” in Brazil’s Cerrado region. Building off of Agroideal, a planning tool that maps social and environmental impact data for potential croplands, the loans aim to finance the acquisition of existing cleared areas.
Deforestation has been a major issue for the soy industry in Brazil, as growing global demand for the crop threatens the Cerrado and other ecologically valuable areas. Under pressure from regulators and environmental activists to improve sustainability practices, Bunge committed to a zero-deforestation policy in 2015. The company’s latest progress report says it aims for elimination of deforestation within its supply chain between 2020 and 2025. The loan program, piloted with $50 million in funding, is an attempt to incentivize these outcomes within Bunge’s farmer network. By providing the capital to finance the purchase of already open areas, the company hopes to focus production gains on existing acreage while conserving forest.
After verifying that land is clear and soy production wouldn’t generate other major impacts, Bunge’s program does not require sustainable growing practices beyond basic sourcing standards. But the certainty provided by its loans — or any long-term agreement like them — does present the opportunity for growers to make substantial investments on the land, once acquired. By providing access to capital for infrastructure, equipment and land preparation, these contracts could help defray some of the risk associated with a shift to organic or regenerative growing.
Mark Tercek, former CEO of The Nature Conservancy, stated in the program’s announcement, “We believe that introducing long-term financing will provide a real incentive for farmers willing to produce more sustainably and go beyond compliance with environmental laws and regulation.”
Multi-Year Agreements from a Farm Perspective
For Ben Barlage of Brickhouse Farm in Minnesota, the opportunities for sustainability advances afforded by a long-term contract are compelling. They are secondary, though, to the increased economic security such arrangements provide. For six generations his family farm specialized in organic dairy, but in recent years the business started to struggle to keep quality high while remaining economically viable. When Barlage and his wife took over operations in February 2019, they began to diversify into beef and organic grains.
An exceptional growing year left the farm with a surplus of grain, opening the door to partnership with Pipeline Foods. When Barlage heard about the opportunity to engage in a multi-year offtake program, he was quick to commit. A fixed annual contract now allows him to budget costs ahead of the season and focus on growing rather than identifying buyers or facing the uncertainty of fluctuating commodity prices. While this does pose a risk of locking into a price below maximum potential, it provides the benefit of peace of mind.
“I’m not the type of person who wants to worry about what the markets are doing come fall,” said Barlage.
Brickhouse Farm was one of the early adopters of Pipeline’s 10-year model, beginning this year with 60 acres of corn and 42 acres of soybeans. For Barlage, the security offered by a decade-long agreement aligns well with the moment of transition for the family business.
“I would love to try new things: edible beans, flax seeds, whatever it may be,” he said. Although corn and soy have the most reliable demand, Pipeline can help farmers identify markets for additional crops sought by companies for future growing seasons.
Ultimately it is the guarantee of a buyer that will direct Barlage’s land use planning for the next decade.
“I don’t want to be sitting on thousands of bushels of corn with nobody to buy it at the end,” said Barlage. “Some people might think I’m crazy for going all in right away, but for me I don’t have to worry about where my grain’s going to go. So I’m okay with that.”
To the extent that conservation practices and sustainability are in demand, guaranteed offtake agreements present one mechanism for implementation at the farm level. This is the rationale behind the programs at Pipeline and Bunge. If leveraged correctly, long-term contracts can help farmers like Barlage advance sustainable production and serve as a promising model for agriculture at large.