Could catalytic capital help shape the agriculture of tomorrow?

Investing in climate-smart agriculture is a hot topic. Startups in plant-based meats and dairy alternatives are taking the market by storm. Major food companies are setting sustainability targets and investing in soil health practices.

Yet farmers face poor farm economic conditions stemming from trade disputes, COVID-19 supply chain disruptions, and increasingly frequent, extreme and destructive weather events.

Farmers across the U.S. have felt the pain of extreme weather in 2020, from the derecho that wreaked havoc in the Midwest to the destructive wildfires that continue to rage out West. (Photo credit: National Weather Service).

It’s clear that more innovation is needed to make the food system fit to face 21st century challenges, and fast. Catalytic capital can help.

3 ways to deploy catalytic capital to boost agricultural resilience

A new report by EDF and Climate and Forest Capital, Catalytic Capital and Agriculture: Opportunities to Invest in Healthy Soils, Resilient Farms and a Stable Climate, finds that there is a profound need and opportunity for catalytic capital to support and scale new climate-smart financial models for agriculture.

report

Catalytic Capital and Agriculture, which was supported by a USDA NRCS Conservation Innovation Grant, identifies barriers holding back investment in climate-smart agriculture and describes areas of opportunity for catalytic capital to address these barriers, as illustrated by five case studies.

Catalytic capital is traditionally defined as the use of blended finance tools to improve projects’ risk-return profiles to match the requirements of market rate investors. This report emphasizes that catalytic capital should also involve funding to support research, policy and technical assistance alongside direct investments to maximize impact.

Three areas of investment show promise for effective catalytic capital deployment:

1. Transition finance

Financing the transition from conventional agricultural practices to climate-smart practices like cover crops, no-till, nutrient use efficiency and extended crop rotations can help farmers get through the three to five years that it typically takes for these practices to pay off.

Mad Agriculture’s Perennial Fund focuses on this solution by raising private capital to provide three-year loans to farmers who are looking to transition to organic and regenerative practices.

Farm Credit’s FarmStart program — which provides young and beginning farmers with equity to help them secure operating loans — also provides the basis for a potential transition finance model for regenerative practices if equity could be provided to farmers explicitly to secure multi-year loans to adopt conservation and regenerative practices.

There is a profound need and opportunity for catalytic capital to scale new climate-smart financial models for U.S. agriculture. Here’s how. Click To Tweet

2. Environmental markets

Environmental markets place a price on the environmental improvements that farmers can deliver.

For example, Iowa Soybean Association and Quantified Ventures are pioneering the Soil and Water Outcomes Fund, which raises private funds to pay farmers for carbon and water quality outcomes that are then purchased by downstream beneficiaries. The purchase of the environmental outcomes pays back the private investors.

3. Regional cluster development

The financial success of farmers adopting climate-smart practices depends on local infrastructure to support, purchase and price the differentiated product. Regional clusters of organic production have been shown to increase social and financial outcomes.

Catalytic capital has an essential role to play in supporting similar clusters of climate-smart production.

The Agrarian Trust strives for these outcomes by leveraging private capital to establish the Agrarian Commons, which provides low-lease land access to beginning and disadvantaged farmers.

Zero Foodprint uses a different approach by working with restaurants to charge a 1% meal fee that supports regional farmers’ adoption of climate-smart practices.

Deploying catalytic capital to have impact at scale

Alongside investments in these key areas, the report recommends that catalytic capitalists identify and target the greatest barriers to change, identify the pathway to reaching scale from the outset, and collect financial and environmental data along the way to hone and scale solutions.

Deploying catalytic capital to tackle barriers that prevent private investment and innovation in climate-smart agriculture is a critical step toward achieving an environmentally, socially and financially sustainable food system.

Foundations and impact investors can use the findings of this report to inform a more strategic and effective use of catalytic capital in U.S. agriculture.

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