Post-Industrial Farm Economics

It’s the end of an era. Yield-maximization is no longer the sole driver of economic success in production agriculture.

Industrial agribusiness since the 1950’s has revolved around cheap food – maximizing the productivity of seed and livestock genetics, fertilizer and pesticides; leveraging efficiencies in technology, handling and processing. Using ‘carrots and sticks’, regulators and markets are breaking this model apart right now, and its traditional profit margin potential.

In addition to yield and price, farmland return on investment (ROI) calculations now include:

1. New and growing government payments;

2. New and growing taxes on greenhouse gas (GHG) emissions;

3. Market restriction/penetration events leading to price spreads;

4. Credit payments toward biodiversity and low carbon intensity; and

5. Professional fees for regenerative practice adoption knowledge-transfer.

For each of the five new revenue streams identified above, below are explanations and case studies showing how farm economics will continue shifting in the years to come.

Government Payments

Like the Conservation Reserve Program (CRP) in the U.S. that reimburses farmers for planting cover crops, Canada’s On Farm Climate Action Fund (OFCAF) doles out cash in exchange for a long list of emissions-reducing practices. When governments need businesses to change, they offer ‘carrots’ such as these payments as economic incentives… and also ‘sticks’, like the carbon tax.

Taxes on GHG Emissions

The more we learn about the GHG footprint of industrial agriculture, the clearer it becomes that someday there will be a tax on fertilizer. Alternatively, the incentives may lead to sufficient reductions to avoid a tax – but one way or another, governments have to move the needle towards their long-term commitments.

The Inflation Reduction Act (IRA) in the U.S. delegates the USDA to track farm emissions, carbon sequestration, and changes over time. With baseline scientific data in place, scores can be assessed allowing for penalties and incentives to be paid to farmers based on known emissions and sequestration associated with field-level land management practices.

Market Spreads

Currently, grain companies are eating the costs of the laboratory testing (for glyphosate residue and heavy metals) and special handling necessary to sell bulk wheat, peas and lentils into certain markets. In the case of oats, most Canadian buyers now require farmers to swath the crop to dry it down ahead of harvest, and prohibit the use of pre-harvest desiccation, in response to pressure from consumers and negative PR.

Actual market spreads aren’t transparent and remain difficult to measure due to transportation differentials between the sources and the destinations in each individual market. The price spreads facing farmers for cash grain with and without market access issues may be minor now, but they are increasingly common and they are widening.

Credit Payments

Next year the U.S. will roll out new ‘45Z’ tax credits to renewable fuel manufacturers based on the carbon intensity (CI) scores of the corn used by ethanol plants, for example. It’s unclear how, or how much of, those credits will be passed back to farmers in the form of market premiums, but it’s reasonable to expect a scale like the ones used to price protein in wheat markets, i.e. to allocate the new funding according to CI scores along a spectrum, supply and demand.

Payments are also coming through The Andersons and Quaker from Pepsi to farmers for mixed-grain intercrops that include oats and canola. Farmers are paid directly by the acre an amount that roughly covers the cost to separate the mixture post-harvest so that each crop can be shipped to buyers individually.

Knowledge Transfer

In post-industrial agriculture, farmers build resiliency through self-study of biochemistry, alternative crop input product formulations, and novel strategies to increase biodiversity. They rely heavily on peer-to-peer learning such that new payments are flowing to the early adopters for farm tours, event appearances, and consulting.

Summary

In the final analysis, farmland managers are adding up to five new revenue streams to the top end of the production budget, where previously there was one (not including the potential for crop insurance payouts). This is before taking into account that qualifying practices reduce future farm expenses.

All told, the new math in post-industrial farming is hundreds of dollars per acre better than production margins have been in recent history. In many cases, the profitability gains accelerate as farm size contracts, and the closer to the end user consumer that it can market its products.

In addition to ingredients, farms are now selling knowledge, new practice adoption, and outcomes related to soil health and biodiversity; and they are doing so efficiently thanks to new technology. It is hard to imagine the intensity of high-input commodity farming remaining economically viable for much longer in light of the tools being used by governments and businesses worldwide to penalize negative environmental outcomes through taxes and marketing restrictions.