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Land investing is hot. Global investor competition for the best farmland has led to an annualised average rise of 12% in values since 2002 and farmland values have outperformed many other commodities, according to Savills’ Global Farm Index. As long-term fiduciary investors on all continents look increasingly to alternative asset classes to meet their return requirements, interest in agricultural land is only going to increase through the 2020s. But the type of farming that happens on this land matters. This is most recently highlighted in Planet Tracker’s analysis on the largest land investors’ failure to properly incorporate environmental risk factors in their portfolio management.
Moving beyond business-as-usual to create durable value
In the UK, the ‘inconvenient truth’ of agriculture is that it is, by and large, fragile, subsidy dependent and barely profitable. According to DEFRA, 42% of the 85,000 recipients of farm subsidies in England are dependent on subsidies for profitability. Another 16% are not profitable even with subsidies. That is nearly 50,000 businesses that do not deliver baseline economic viability. While there are those who perform well in financial terms, most farms – including many of those certified as organic – are profitable at the significant cost of their ecological impact.
Agricultural food supply chains are responsible for 10% of all GHG emissions in the UK and up to 25% globally. This makes it the second biggest global GHG emitter. From an investment perspective, conventional industrial agriculture has the characteristics of a stranded asset: capital invested in something so extractive it will run out of road.
In contrast to resource intensive agriculture that relies on unsustainable water extraction, industrial pesticide and herbicide applications, and depletes soil quality, regenerative agriculture is a knowledge-intensive, value-added approach which uses ecological systems to increase profitability. Input costs are reduced and natural synergies maximised by layering agricultural enterprises on the same piece of land to boost financial returns.
UK investors should lead the shift to regenerative agriculture practices
Regenerative agriculture can be significantly more profitable than industrial approaches. Our conservative analysis shows it is possible to take the internal rate of return of a large mixed owner-occupied farm in England from around 2% profitability to double digits in under five years.
This should be unsurprising as the principle has been evidenced internationally for decades. From large-scale sugar plantations, cattle and sheep ranches to horticultural and arable enterprises, a consistent picture has emerged: investors in farmland and their farmers can produce affordable, nutrient-dense, healthy food on regenerating soils profitably and at scale.
Regenerative agriculture not only builds the core asset – the soil – but also makes it more resilient and adaptive. For example, regenerated soil can handle droughts and torrential downpours because healthy soil can absorb and hold nine times its weight in water; dead dirt – soaked for years in a cocktail of chemical herbicides, pesticides and insecticides – effectively absorbs none.
A global opportunity to boost yields & carbon sequestration
Converting agricultural operations to follow regenerative agriculture principles also leads to significant increases in the level of carbon sequestration. According to peer-reviewed research, a net positive rate of 13+ tonnes of CO2 equivalent per hectare per year is being achieved in midwestern US beef finishing systems. These practices can be scaled globally, but the key is to start the transition in a systematic manner. Whether it is growing soybeans for tofu or raising beef cattle, we can move farming from a climate problem to a climate solution and achieve numerous other positive social and environmental impacts at the same time.
Scaling regenerative agriculture offers the potential for a new asset class. This asset class will be defined and certified based on the performance of its core asset: the soil. Conventional farming is a form of unsustainable soil mining which uses up, degrades, and erodes the soil. In the UK, government reports cite research which concludes that over 85% of UK topsoil has been lost since 1850.
How can UK land investors step up to build out this new asset class?
The approach to systematic land conversion into a regenerative agricultural system is well tested around the world. The shift towards more regenerative agriculture is already beginning through efforts by private equity players in the US and Australia. Our work to build institutionally investable regenerative agriculture in the UK will require new players to enter the sector and disrupt business-as-usual practices based on decades of subsidy-led production in key segments of the agricultural market. If that happens, a new asset class can be created, others will follow, and in years to come we will all look back and wonder why we ever grew our food any other way.
Mark Drewell is the Executive Chair of New Foundation Farms