CREO Regenerative Ag Report
- Ashu Sikri (Unlicensed)
Lots of great intel and framing in this report (which is US focused but relevant to our work), recommended read.
@alesha (Unlicensed) and @Eric Firnhaber (Unlicensed) I have come across a couple recent sustainable ag focused research notes from CREO which apparently advises family offices on how to invest in decarbonization; may be a good prospect to speak with re: funding platform once its a bit more fleshed out.
Calling out a few highlights from the note:
Identified three key hurdles to scaling up of regenerative practices
“The Data Gap refers to the lack of adequate on-farm management and biophysical data, as well as the lack of appropriately calibrated financial models for regenerative practice.
The Financing Gap refers to the lack of flexible financing instruments to support regenerative conversions.
Lastly, the Partnership Gap refers to the lack of appropriate channels for the diffusion of data, financing alternatives, and market opportunities for regenerative farmers and products.”
“Here, a perverse cycle presents itself—a lack of adequate information on climate risk and agricultural resilience under regenerative cultivation systems impedes lending; the lack of finance for regenerative practices impedes the total acreage that could be used to gather data on profitability, transition costs, and socio-ecological resilience metrics. Nevertheless, private debt issuers and some regional community banks are offering innovative financial products to help interested farmers surmount financing gaps. The key attributes of these financial products that boosts their attractiveness to farmers seeking to make the leap to regenerative is through deferred repayment timelines, acceptance of alternative forms of collateral, tying rates to measurable ecological outcomes, and pairing finance with strategic technical assistance networks and CPG company partnerships.”
AS comment: I wonder if it makes sense to have MOUs in place with a few large buyers as we ramp up funding platform pilots
Examples of some funds deploying instruments in line with what we are exploring
rePlant Capital is a financial services firm and Public Benefit Corporation focused on helping farmers overcome hurdles to transitioning to regenerative and break free of the debt treadmill. They offer catalytic capital that works in concert with traditional lenders to provide flexible, low- interest rate real-estate or operational loans. Their products include a Soil Fund, which offers investors the choice of a market rate return or an opportunity to use philanthropic dollars to fund zero-interest rate loans to farmers. Their loan products are attractive to transition-phase farmers as they offer reduced interest rates, multi-year terms for operational loans, deferred payback periods, and alternative forms of collateral evaluation. In some cases, rather than requiring a fixed amortization schedule, they’ll allow for repayment as a percent of cash flows, allowing farmers to pay back loans only when their investment starts paying off. They have paired finance alongside strategic partnerships with technical assistance providers to close information gaps and integrate measurable ecological outcomes within loan covenants, coordinating lenders and farmers to design acceptable in-field measurement schemes. Lastly, they have strategic partnerships with CPG companies to transition corporate supply chains at scale and help farmers access long-term offtake agreements for regeneratively produced products at stable, attractive price points.
Using their Soil Fund, rePlant Capital is enabling large CPG companies such as Danone to more effectively engage their supplier networks around the regenerative transition. CPG companies identify large farms within their supply chain with interest in improving soil health and provide them with assurances of buyer continuity and funding for on-farm monitoring of ecological outcomes. CPG partners then bring in rePlant as a financial services provider for farmers interested in making the transition. For the farmer, rePlant provides more flexible, lower-cost sources of capital and relationships with non-captive technical assistance providers to implement and manage best-practices in ecological outcomes monitoring. The combination of financial innovation and technical information networks is the critical “missing link” that allows CPG companies to take action directly within their supply chains to improve resilience.
Gradable / FBN: With the FBN analytics infrastructure, Gradable drives the outcomes assessment and verification process and demonstrates to institutional lenders creditworthiness via reduced risk. Their first pilot project tests two hypotheses. First, the thesis that ecological outcomes are a proxy for reduced credit and insurance risk, and that such a proxy can assist commercial lenders in sourcing more creditworthy customers. Second, the pilot tests a rate reduction on the back of transparent, verifiable parameters around ecological outcomes that can feed into green bonds markets. While subsidized with philanthropic funds to cover the risk of the pilots, Gradable aims to demonstrate commercial viability through pilots such that their model can be scaled through commercial capital alone.
Gradable builds off the FBN Analytics platform to ingest, validate, and verify practices on the farm. Through a combination of analysis and custom reporting, farmers can optimize planning decisions, making it easier for them to explore the viability of a portfolio of regenerative practices. Gradable allows third parties to triangulate claims around farm practice and ecological outcomes across multiple data sources, reducing the cost of verification for certification protocols or for retailers seeking transparency around supply chain targets.
Perennial Fund, operated by nonprofit Mad Ag, offers farmers transitioning to regenerative or organic cultivation long-term, flexible operation loans paired with technical assistance and market access services. They offer farmers a ten year note with a “pay what you can” model for the transitional phase, typically a three-year period, implementing a revenue sharing structure once certification is complete. They also provide farmers with added flexibility in the form of up to two deferral years in the case of weather or price volatility.
Many small-to-medium scale farms are underserved, given minimum loan size requirements offered by many banks or Farm Credit lenders. Steward, a registered B Corp, is a microfinance startup that applies a crowdfunding model to pool capital and underwrite small farm loans to such underserved farmers. Individual investors commit capital into their Steward Farm Trust, which acts as a servicing agent and conducts due diligence on lending opportunities, issuing investors a dividend-paying stock.
Many AgTech advances have been built on the thesis that farmers are underserved from a data perspective. There is now rapidly growing recognition that lenders and insurance providers are similarly underserved, particularly when it comes to pricing forthcoming climate risk and the resilience benefits regenerative practices can provide. We are starting to see a groundswell of data collation and real-time monitoring technologies at multiple levels of the supply chain. Coupled with awareness of the massive cost of climate risk, we can expect a substantial opportunity for actors to provide risk assessment or fintech products in service of farmers who take measures
to protect soil health and build landscape level resilience. As an illustrative example, lenders or insurance companies could purchase data or software licenses for improved risk models provided by the network of third-party data providers. They could then use that information to provide a potential rate reduction or premium to farmers who implement “climate safe” on-farm practices or rebalance their lending portfolio to account for diversity in cultivation type. They could also use this information to target under-valued farms for investment.