Sustainability Markets, Part 5: Good Business Practices for Farmers Participating in Agriculture Ecosystem Credit Markets
Market Intel / April 27, 2021
AFBF’s Market Intel is publishing a five-part series to highlight the opportunities, challenges, policy levers and overall operation of agriculture ecosystem credit markets.
This Market Intel article, the last in the series, looks at the development of good business practices for agriculture ecosystem credit markets and assesses the markets’ long-term impacts.
This Market Intel article should not be taken as legal advice.
Soil Carbon Contracts
Enrollment in any ecosystem credit market is a contractual agreement between the farmer or rancher and other market participants. These contracts generally commit the farm or ranch to conservation practices in exchange for payments or credits for ecosystem services or “natural climate solutions.” This article focuses on renewed interest in rewarding farm practices that increase carbon stock in soils, although various other markets are paying farmers and landowners for ecosystem benefits such as capturing methane from manure digesters or sustainable forest management.
The creation of carbon credit markets is being driven largely by two factors: government mandates to reduce greenhouse gas emissions, as in California, and pledges by private companies, like McDonald’s and other household brand names, to offset their own greenhouse gas emissions. This creates a demand for carbon credits, which are certifications that carbon dioxide has been removed from the air through climate-smart farming practices that store carbon in soil, plants and trees. Such practices include no-till, precision fertilizer application and cover crops. The carbon reductions are usually verified by a certification organization as a marketable carbon credit that can be bought and sold, just like any other agricultural commodity. Because carbon markets are part of a larger ecosystem services market, farmers and ranchers may be able to “stack” credits for habitat preservation, water quality improvements and other environmental benefits.
When a farmer or rancher sells a carbon credit, they essentially sell the rights to claim that carbon reduction to another person. The farm operator must also share certain farm data that supports the quantity of stored carbon, although there are ways to protect business-sensitive information. Where land is leased or contracted, the landowner and lessee should agree on how carbon rights will be allocated, and how climate-smart practices can be continued if the lease term is shorter than the duration of the carbon project.
For over a decade, carbon credits have been issued by nonprofit certification organizations under protocols that define which climate-smart practices qualify and how to measure carbon reductions. More recently, electronic marketplace platforms are issuing their own brand of carbon credits and providing online matchmaking services to bring sellers and buyers together, usually for a fee. Some large agricultural supply companies are developing carbon programs to assist farmers with monetizing carbon along with other farm products. These various market opportunities all come with different contracts with varying terms and conditions.
Farmers and ranchers can set up their own carbon projects or work with middlemen (sometimes called aggregators) that provide financing (for example, advance payments for no-till equipment) and buy the carbon credits from the farm or ranch to sell to their own customers. Consultants are also available to share know-how for getting carbon credits approved. Because there is currently no standardized market for carbon, farmers might be approached by a variety of carbon programs, middlemen and consultants with different arrangements. Somewhat surprisingly, there is no standardized definition of what a carbon credit actually is. Some carbon programs will issue carbon credits in exchange for a commitment to continue climate-smart practices for as little as 10 years using “best efforts” to store carbon. Other programs require a 100-year commitment to guarantee permanent carbon storage. Some carbon programs require actual soil sampling, while others will issue carbon credits based on modeling. The amount of carbon credited for particular farm practices varies by carbon programs as well. The extensive differences in in how carbon reductions are defined and measured will likely result in a wide range of prices per ton of carbon in different markets.
At this point, there is no universal price for farm-stored carbon. The carbon market is driven largely by sustainability pledges made by well-recognized brand-name companies, so pricing is heavily influenced by the type of credit the buyer wants. Currently, prices for agriculture carbon typically range from $10-$20 per ton or per acre, but the devil is in the details. As any farmer knows, commodity prices are not the whole story. Net profitability of farm carbon is a function of the price of carbon, the cost of implementing carbon-friendly practices on the farm, any loss of productivity, data costs associated with measuring carbon improvements, and fees charged by project partners, brokers and sales platforms. Typically, the farmer or rancher must arrange for soil testing and verification of conservation practices on an annual basis, and the project economics must account for this ongoing cost. Also, discontinuing practices or changing land use might result in forfeiting credits or paying a penalty, depending on the carbon program and sales terms. Usually, these costs are negotiated with project partners. Typically a project partner or broker will handle marketing and sale of the credits to third-party buyers.
Carbon markets will continue to evolve as an increased focus on climate policy and corporate sustainability commitments drive demand for natural climate solutions.
Data Ownership and Privacy
AFBF policy supports farmers owning the information generated on their farming operations. With that said, in order to verify compliance, ecosystem credit markets require data collection, monitoring and sharing with the market-operator. Essential data ownership and privacy principles include:
- Contracts should explicitly identify all data that will be generated and shared.
- Contracts should identify the purposes for any data collection, who will receive the data, and whether the farmer can limit the use and disclosure of information.
- Contracts should not require sharing more information than necessary to execute the market operation. Any information shared should be kept private to the maximum extent possible.
If the government becomes a collector of farm-level data, the farmer’s information should be protected from being disclosed pursuant to Freedom of Information Act requests.
In 2014, the American Farm Bureau Federation and other commodity groups, farm organizations and agriculture technology providers created a set of “Core Principles” that ag tech providers should follow when collecting, using, storing and transferring farmers’ data.
The “Core Principles” are: education; ownership; collection, access and control; notice; transparency and consistency; choice; portability; terms and definitions; disclosure, use and sale limitations; data retention and availability; contract termination; unlawful or anti-competitive activities; and liability and security safeguards.
The Ag Data Transparency Evaluator resource audits companies’ agricultural data contracts so farmers have a better understanding about their company partners. The Ag Data Transparent seal is used to recognize companies that opted to have their contracts reviewed against these core principles for transparency purposes.
While this resource is helpful in providing some transparency for farmer-partner contracts, it is very important that farmers do their own due diligence. This resource can be helpful to evaluate companies’ contracts for transparency purposes but does not indicate whether or not the contract is good for farmers. These kinds of agreements are new to agriculture and require a thorough review and careful analysis of the potential impacts.
Ecosystem Credit Markets in the Long-Run
As with any start-up company, there is always a risk of business failure. Contracts should specify a farmer’s continuing obligations if the market-operator fails while the farmer is still enrolled. In addition, for this emerging market, contingency plans that provide risk management tools for farmers and ranchers and the assets they generated should be developed in the event a market fails.
The value companies and consumers place on sustainability, as well as their respective willingness to pay, has yet to be accurately estimated. Future research should attempt to infer consumers’ willingness to pay for goods given the fact that these credits will cost additional money to produce.
Increased investment in technology and the advancements that have come with it have reintroduced opportunities for farmers and ranchers who want to voluntarily participate in ecosystem credit markets and potentially earn additional revenue. Companies of various sizes across numerous industries are making sustainability commitments that are priming them to become buyers in an ecosystem credit market. The many potential market-operators farmers and ranchers could contract with are developing different pricing models and market structures. Farmers and ranchers have unique barriers of entry, most of which are related to their risk tolerance. If participating in a credit market is the right decision for them, there are still some points of caution.
Bottom line: these markets are developing and evolving at a rapid pace. Farmers and ranchers should gather as much information as possible in deciding whether or not to participate. That is why it is important participation in these markets remains voluntary, with incentives that encourage conservation practice adoption, rather than hinder it. If it looks like a good fit, the farmer or rancher will make the necessary trade-offs to take advantage of the opportunity.
AFBF Market Intel wishes to thank Max Williamson of Williamson Law + Policy for providing insights into carbon markets and climate finance that were incorporated into this installment. This Market Intel article should not be taken as legal advice.