Show Me the Money: Making a Downstream Market for Diverse Regenerative Crops

In the words of the great agricultural philosopher Liza Minnelli, “Money makes the world go round.” Most stakeholders RAI interviewed across agricultural supply chains, especially farmers, want to grow crops and raise livestock in a sustainable way. Yet this desire to minimize environmental harm is not feasible if it creates a financially unsustainable operation. Farming is fundamentally a business - profitability is essential for affordable food production, long-term solvency, and accessible financing. 

The prospect of positive financial returns is imperative to incentivize sometimes risky, wholesale change. Farmers are operating on thin margins - low commodity prices, combined with rising input costs, led to stagnation or decline in overall farm profitability in 2019. Thus, to drive a large-scale transition from conventional to regenerative agricultural practices, it is important for growers to retain or even enhance profitability during and after the transition. To help ensure this profitability, there are multiple interventions across the agricultural supply chain that could create attractive markets for regenerative products and/or reduce financial risk incurred by growers. 

This article focuses on the final stages of the agricultural supply chain: purchase and consumption. It details two broad categories of downstream interventions: economically-motivated interventions (e.g. price premiums) and risk-motivated interventions (e.g. demand guarantees). Guaranteed downstream demand and willingness to pay for regeneratively produced products can help increase farm profitability, providing a pathway to scale. 

Economic Opportunities to Increase Farm-Level Profitability

Price Premiums: The Holy Grail
Consistent price premiums for regeneratively produced products could boost adoption of sustainable growing practices. Unfortunately, consumers rarely see this value in the price tag. Most consumers are unfamiliar with the term “regenerative” and many feel overwhelmed by the number of environmentally focused certifications on the market. Food companies are realistic about the unlikely prospects of environmentally-driven premiums. “We likely don’t have time to wait for the majority of consumers to start eating for planetary reasons,” say General Mills soil scientist Steve Rosenzweig and his colleague Tom Hockenberry, Senior Director of Nutrition and Technology. They prefer to “grow and raise what they are eating today in a regenerative fashion.”

Yet, there is some reason for optimism: consumer behavior may change with evidence of a link from regenerative production to health benefits. Such evidence comprises the “holy grail” for scaling regenerative farming, says Eric Jackson, Founder and Chairman of Pipeline Foods. Pipeline is working with private research consortiums to amass evidence to support this connection between nutritional benefits and farming practices. 

Many other organizations, from universities to industry partnerships, are also funding similar research analyzing the impacts of regenerative practices on nutrient density. This optimism should be somewhat tempered - scientists have sought a link between soil health and human health for decades. This connection underlies Sir Albert Howard’s The Soil and Health, the seminal text of the organic movement.  

In addition to paying more for healthier, regenerative products, consumers are indirectly incentivizing regenerative production by exerting pressure on food companies to strengthen corporate sustainability programs. The second half of this article focuses on risk-based interventions, detailing different corporate food purchasing strategies that aim to increase adoption of regenerative practices. These strategies are a sign that big food companies are reacting to market pressure.

Ecosystem Services Payments
Building a market for beneficial ecosystem services associated with regenerative practices is a different avenue to boost farmer revenues. In this model, farmers would receive an extra payment for ecosystem services rendered during production, in addition to revenue received from crop production. These ecosystem services could include increases in soil carbon, reductions in greenhouse gas emissions, improvements in water quality, and reductions in water quantity used.  

As mentioned in this series’ introductory article, the Ecosystem Services Market Consortium is building a platform to launch trading in ecosystem services in 2022. The ESMC team is refining the protocols to quantify the magnitude of different ecosystem improvements and investing in technologies that enable these calculations at scale. The quantified changes will be monetized and sold as ecosystem services credits, with farmers receiving payments for ecosystem improvements rendered. The ESMC is targeted toward large corporate buyers looking to achieve carbon and water reduction commitments across their supply chains. A third-party certification body will verify reduction claims. Currently, the ESMC protocol is being tested on 50,000 acres to assess feasibility. 

Nori, a different ecosystems service online platform, focuses on increases in soil carbon. Unlike ESMC, Nori is building a blockchain-based marketplace. Nori uses the COMET-farm model to quantify the amount of carbon sequestered from different farming practices and subsequent third-party verification of carbon credits. Nori will then pay farmers for this amount of carbon removed, and issue a cryptocurrency token. Anyone can purchase this token via the online marketplace. The Nori team believes this market mechanism will facilitate discovery of the true value of removing a unit of carbon from the atmosphere, and is not dictating a price for the Nori token. 

Indigo Ag is also creating a greenhouse gas marketplace that employs a slightly different model, dictating a potential initial price of $15 per ton of carbon sequestered. Indigo is working with carbon registries to develop a new verification methodology that relies on satellite imagery and soil sampling to quantify the volume of carbon sequestered in soils. Farmers have enrolled 14 million acres in the program so far, signaling a strong interest and demand for this type of payment system. These farmers are not yet getting paid for credits. On the demand-side, Indigo is targeting sustainability-focused companies and individual consumers seeking a voluntary carbon offset market. 

Farmer Risk-Mitigation: Opportunities to Guarantee Downstream Demand
In addition to a lack of price premium and nascent ecosystem services markets, scale faces uncertain demand. ”Farmers are committed stewards of the land and will adapt their practices with a long-term view towards soil and water health and biodiversity,” says Benneth Phelps, Dirt Capital’s director of farmer services “to the extent to which their buyers and the policies under which they operate understand and reward strong stewardship practices.” 

That extent is growing. The farm and food sectors, policymakers, philanthropy and others working in partnership to create new, educated markets for farmers has allowed opportunities for greater stewardship practices to be economically sustainable. These stakeholders are targeting two audiences: replacing conventional products with regenerative versions and growing new crops using regenerative principles.  

Long-term contracts can help farmers reduce market risk by guaranteeing prices and/or market outlets. For example, Danone employs long-term contracts for several dairy partners as a part of its focus on regenerative agriculture and commitment to achieve carbon neutrality by 2050. The Danone Cost Plus Model offers five year contracts to specific dairy farmers, paying the cost of their production plus a margin. Guaranteeing this margin enables farmers to “think differently,” says Tina Owens, Senior Director of Agriculture. The contract facilitates long-term planning and farmers are “more likely to be early adopters of new practices,” she adds. Though a promising idea, this model is still experimental. It remains to be seen if soil improvements will materialize in the five-year timeline specified in the contract. 

General Mills, another regenerative agriculture industry leader, is investing in land. In 2018, it announced a strategic sourcing agreement with Gunsmoke Farms LLC to convert 34,000 acres of conventional farmland to certified organic acreage by 2020. The company has not specified if it will adhere to the organic regenerative standard as well. Midwestern BioAg will provide on-the-ground training to incorporate regenerative practices on the farm. This agreement is part of General Mills larger commitment to advance regenerative practices on one million acres of farmland by 2030.

Pipeline Foods also uses long-term contracts when purchasing from organic farmers to incentivize more sustainable agricultural practices. These offtake agreements, essentially a sales contract, are a “core of their business” according to Jackson. Pipeline is planning to offer ten different contractual offtake products that are customizable to suit the needs of growers, food companies, and financing firms. The Conservation Finance Network has explored the benefits of these types of guaranteed offtake agreements in incentivizing sustainable farming practices. 

These large-scale, long-term contracts mostly serve commodity crop producers and rely on existing market infrastructure. Other risk-mitigating opportunities to guarantee downstream demand seek to build new digital infrastructure for regeneratively-produced commodities. 

Generating Demand By Connecting Farmers and New Customers: Technology-Enabled Market Development
Some stakeholders argue the complexity of agricultural supply chains is a barrier to regenerative adoption. In conventional agricultural supply chains, growers sell an undifferentiated commodity to a nearby grain elevator, processor, trader or marketer. These intermediate processors further refine and distribute food products across the country. Selling into the undifferentiated global commodity market seems to erase the chance to price (and pay for) specific production practices. Furthermore, for many agricultural commodities, market consolidation at the processing stage has increased over recent years. This risk of monopsony power across key buyers is a significant concern for farmers’ seller power. 

Regenerative niche marketing can create a way around the big buyers. Connecting farmers and ranchers with additional customers outside conventional supply chains could increase farmers’ bargaining power, enabling growers to capture more revenue from their products. Furthermore, directly connecting farmers with niche downstream buyers could also help growers command a sustainability-based price premium. To achieve this outcome, a few start-ups are working to build digital marketplaces that directly connect farmers and downstream processors or customers. 

Mercaris, another startup, is developing a trading-focused platform that connects buyers and sellers of organic products. Mercaris also aims to provide increased pricing transparency across the organic sector. Indigo Ag offers Indigo Marketplace, an online platform designed to cut out the middleman and directly connect growers with buyers seeking regenerative (or other specific) attributes. This model could boost farmer profitability by connecting growers with buyers across the online marketplace, enabling growers to receive bids from more than just local buyers. Agronomists work with farmers to verify specific production practices, for which buyers may pay a premium. 

New Crops: A Challenging Path to Scale
The previous sections discussed different price or risk-motivated interventions that incentivize improved growing practices of common commodity products. Some stakeholders believe a separate approach could also incentivize sustainable farming: building demand for new products that would be produced sustainably. This would occur either with or in lieu of farming of major commodities. Introducing new crops or expanding crop rotations can introduce beneficial diversity into ecosystems, a core tenant of regenerative practices. 

This intervention may prove more challenging than incentivizing regenerative production of crops conventionally grown in a region. Growing new crops at scale can prove challenging both because of a lack of infrastructure and because of inferior genetics and breeding programs. 

For example, corn and soybean rotations dominate production across the Midwest. Reintroducing other grains, such as oats, wheat, rye, or barley, could help control weeds and reduce erosion. These small grains are not commercially viable when compared with ultra-efficient corn and soy seeds that are bred to tolerate diverse environmental conditions, the result of extensive research mapping of the entire maize genome and comprehensively studying soybean production. General Mills confronted this problem when trying to commercialize kernza. The company was forced to scale back product rollout plans after farmers experienced significant crop failure, the result of poor weather and late planting.  

Beyond inadequate plant breeding research, there is also a lack of information about the impact of diverse grains in animal diets. Animal feed is a key market for farmers: feed is the final destination for a majority of soybeans and roughly a third of corn grown in the United States. The Practical Farmers of Iowa (PFI) and Sustainable Food Labs are working to fill this research gap to help unlock this market for regenerative farmers. The coalition recently published a meta-analysis of research studies on the impact of small grains in different animal diets. 

In addition to funding research, PFI is training farmers to grow food-grade diverse grains. These efforts have proven somewhat fruitful, as Oatly launched a pilot program to source oats from growers near their operations in Iowa. 75% of participating farmers produced food-grade oats in the first year. 

Instead of large-scale research, breeding, and training efforts, regenerative farmer Gabe Brown is working at a smaller-scale to build local markets for more diverse crops. “Farmers need to make their own market” for specialty crops, says Brown, citing his own experience building demand for winter triticale and hairy vetch. He is one of the larger producers in his area, producing seed for other farmers as well. Yet Brown recognizes this market-building practice requires “extra work” to find buyers, mentioning a friend who contacted over 100 potential buyers for a single specialty crop. Specialty crops also can require new equipment, storage infrastructure, and different crop insurance - all significant barriers to adoption.

Beyond the research and infrastructure challenges described above, the global impacts of American farmers transitioning from corn, soy, and other commodities to new crops are not well understood. If purchasers instead seek the same volumes of commodities from less regulated regions, like Brazil, this change could catalyze additional deforestation and other adverse environmental impacts. A systems-level problem-solving approach that also works to shift demand from conventional commodities to new regenerative crops will also be needed.

Developing secure markets is essential to reduce risk and incentivize farmers’ transition from conventional to regenerative practices at scale. There are multiple interventions at the downstream end of agricultural supply chains that can help increase farmer profitability, enabling adoption of regenerative agriculture at scale. To boost prices, consumers can seek out regeneratively-grown products and pressure food companies to purchase regeneratively-grown crops. To guarantee demand, food companies can structure long-term agreements. Farmers can also capitalize on development of new, technology-enabled markets. The impact of these downstream interventions would be magnified by additional changes upstream: offering more widely accessible farmer training programs, increasing financial investment in regenerative farmers and land, and reforming crop insurance to incentivize regenerative practices.