Regenerative agriculture:

The super-strategy making dollars from dirt

Shyam Gharial

Senior Investment Consultant

Regenerative agriculture is a value-add approach to agriculture that is quietly turning dirt into dollars. Beyond its panacea-like properties in addressing the climate, biodiversity and human health crises, this soil-centric revolution can lead to robust financial returns for investors.

With lower input costs and more resilient crop yields compared to the conventional farming approach, I believe regenerative farming systems can sow seeds of prosperity and provide an attractive investment opportunity.

Regenerative agriculture can contribute to securing our future from food, climate and biodiversity perspectives. Fortunately, investors can also find compelling return in it with patience and discernment.

Investments and savings

Through an appropriate combination of regenerative practices, nature can provide a substitute for chemicals that kill rival plants, fungi and pests. It can also reduce the need to purchase costly seeds that are genetically modified to withstand those chemicals. If a regenerative system achieves its goal of improving soil health, lower amounts of synthetic fertilisers need to be purchased.

There are upfront costs involved with switching to regenerative agriculture though, involving learning, investment in equipment and planning. Institutional investors, with greater financial capacity and timescales, can absorb these transitional costs more easily than struggling farmers. For the latter, the challenge lies in balancing immediate financial and time constraints with the promise of longer-term benefits.

The use of regenerative practices without a primary goal of improving soil health or managing the interconnected elements of a farm as a system, in my eyes, is not regenerative agriculture though.

Conventional agriculture		Regenerative agriculture
Long term failure for global population	[	Required for food production over the long term
Large scale	[	Small scale (at the moment)
High (and increasing) chemical costs	[	Reduces input costs
Kills living things	[	Supports biodiversity
Reduces food quality	[	Increases nutrients in foods
Large emitter of GHG emissions	[	Sequesters GHG emissions
Relatively simple method focused on a single commodity	[	Requires more work and planning – multiple commodities

Navigating the regenerative landscape: a definition

As far as I see it there are two key aspects to assessing whether an agriculture investment is regenerative:

1. A holistic approach, which treats the farm as a system; an interconnected web, where soil, plants and animals coexist. This requires deliberate planning and an element of trial-and-error to find a good blend of practices, species, etc.

2. A goal of improving soil health. Using an investment analogy, imagine the soil as invested capital. Just as investors seek to enhance capital values, regenerative agriculture aims to boost soil health. However, this isn’t just an analogy; when an investor allocates capital to buying a farm, that capital value is underpinned by the productiveness of the soil. The dividends of a regenerative approach are then increased land value, resilience, carbon sequestration and ecological vitality alongside the cash-crop yields.

A regenerative approach often includes practices that minimise soil disturbance, for example avoiding ploughing by using discs to slice the soil when sowing seeds or by using precision navigation technology on tractors to avoid compressing the soil excessively.

It can also involve the integration of livestock, to provide fertiliser and control weeds, or trees, to reduce nutrient run-off and provide shelter from winds blowing away soil.

Regenerative systems, often work with nature, embracing biodiversity and sequestering large amounts of carbon

Building resilience in the face of climate change and biodiversity loss

Agriculture is one of the highest greenhouse gas emitting sectors and contributes significantly to biodiversity loss. Regenerative systems, though, often work with nature, embracing biodiversity and sequestering large amounts of carbon. This contrasts with conventional agriculture where farms often focus on a single crop, at the expense of all other life, and where they break up soil, releasing carbon to the atmosphere.

Since regenerative systems often use more than one crop, they diversify return streams, so when climate impacts hit one crop, others still provide an income. They also build resilience to floods and drought, which we are experiencing more of through climate change. Additionally, sales of carbon credits could potentially enhance returns.

Unlocking opportunities for institutional investors

In general, developed market farmers are ageing, and young successors are scarce. As existing farmers retire or pass away, a significant transfer of farmland will take place. In the US alone, up to $1tr of farmland is poised to change hands over the next decade. This generational shift creates a vast space for institutional investors to step in to aggregate holdings.

There are different avenues to access regenerative agriculture. Most are illiquid with 10+ year lock ups, but some have an open-ended structure offering annual liquidity.

1. Farmland:

The value-add element to regenerative agriculture over conventional agriculture should make this approach attractive, increasing expected returns by around 1-2% p.a. which generates total net returns approaching 10%. There should also be lower volatility due to the potential for multiple return streams and greater resilience to extreme weather events.

There is also very little leverage on farmland so, not only is it insulated from the effects of credit market events, but it should also exhibit lower volatility than commercial or residential real estate.

The benefit to an investor’s broader portfolio comes through the contribution this type of investment can make to limiting the negative financial impacts of climate change and biodiversity loss along with its low correlation with equity and bond returns.

2. Corporate equity or debt:

There are also more zestful opportunities in the supporting technology to switch to regenerative agriculture for investors seeking much higher returns – at around 20%.

For example, Tikehau has launched a €1bn private equity fund in partnership with AXA Climate and Unilever that invests across multiple supporting areas including alternative inputs (pest control, fertilisers, seeds, etc), operating equipment (automation, technology that reduces soil disturbance, water management, etc), sustainable foods, naturally occurring chemicals, soil health measurement technology, supply chain transparency and agricultural financing solutions.

The volatility of these types of funds is comparable to private equity.

Cultivating regenerative agriculture’s promise

Agriculture is woven into the fabric of our civilization and has evolved alongside humanity.

The invention of the Haber-Bosch process in the early 1900s created fertiliser at scale and enabled a revolution in agriculture to feed a rapidly growing population. Chemical reliance and monocropping subsequently became the norm. The unintended consequences of sustained chemical use have taken a toll. Soil health has declined, demanding ever-increasing chemical volumes as an offset. Paradoxically, food grown in poorer quality soil yields fewer nutrients, meaning we are either missing some nutrients or need to consume greater volumes of food to obtain the same level of nutrients.

With a projected global population exceeding 10 billion, we are faced with a huge challenge. Regenerative agriculture can contribute to securing our future from food, climate and biodiversity perspectives. Fortunately, investors can also find compelling return in it with patience and discernment. Whether that is through direct farmland, private equity or as smaller allocations within other portfolios, we can guide you down the path to regenerative, sustainable returns.