As conversations around reducing emissions intensify across the agricultural industry, there’s a growing focus on the benefits of sustainable farming and regenerative agriculture. With more food suppliers and growers adopting these practices, some industry leaders see this approach as an opportunity to accelerate the transition. How to build on that momentum drove much of the conversation during a panel at the BMO Capital Markets 18th annual Farm to Market Conference in New York. The session was moderated by Joel Jackson, Fertilizers and Chemicals Analyst, and Andrew Strelzik, Restaurants, Beverages, Agribusiness and Protein Analyst at BMO Equity Research. They were joined by Paul Scheetz, Director Climate Smart Ag Origination, Archer Daniels Midland (ADM), a company that focuses on the farmers and purchases crops and transforms them into food, fuel, or feed, and Ashish Batra, Global Regulatory Affairs Research & Development Sustainability Leader, Corteva Agriscience, which offers farmers cutting edge seed technologies and digitally enabled crop protection solutions. Defining Regenerative Agriculture Joel Jackson started the conversation by asking: What is regenerative agriculture? He noted that although there is no widely accepted definition yet, in essence, it is the practice of farming and ranching using methods that rehabilitate the soil and surrounding ecosystem. Corteva’s Batra pointed out that while the details of its execution may not be universally agreed upon, the industry recognizes that regenerative agriculture enhances the entire value chain. “The focus really needs to be on outcomes,” he explained. “You’re trying to drive towards better biodiversity; you’re trying to drive towards better soil health, better water use, and efficiencies.” He added that the regenerative agriculture solutions that will deliver those outcomes will differ region by region. Incentivizing Adoption The Inflation Reduction Act (IRA) has been one of the most recent drivers encouraging the adoption of regenerative farming practices in the United States. With nearly $20 billion earmarked to be invested in climate-smart agriculture over the next five years, both Scheetz and Batra agreed the IRA could serve as a significant incentive for farmers to make the transition. “The IRA bill also includes the ability to score field-level emissions for the carbon intensity of the plants that we will ultimately use for biodiesel, ethanol and potentially SAF (sustainable aviation fuels) in the future,” noted Scheetz.  It’s not a one-size-fits-all approach; at the end of the day, every farm is different. What works for one, like cover crops, which are plants used to manage soil erosion and water rather than for harvesting, won’t work for every farm. “It takes coordination across the agriculture supply chain farmer groups, industry groups, along with legislators as well to make sure they can see the whole picture,” he added.  Both Scheetz and Batra agreed that regulators in the U.S. and abroad need to embrace the idea of individualized approaches to regenerative agriculture. “We have a guiding principle within our organization to think globally but act locally because all regulatory policies are done at the local level,” explained Batra. He pointed to the difference between regenerative practices needed for rice paddies in Asia, versus row crops in North or South America. “We look at it holistically — it needs to be a fit for the purpose, a fit for the geography.” The Missing Pieces Fortunately, there have been gains in all areas of regenerative agriculture, especially in the U.S. Over the past 40 years, no-till farming, which decreases the amount of erosion farming causes in certain soils, has increased to more than 100 million acres from less than two million acres. A similar transformation is happening with cover crops, which in 2020 reached approximately 20 million acres — a 20-fold increase since 2000. However, much remains to be done to speed up that adoption, especially when it comes to addressing farmers’ concerns. “With every region you’re in, you have to do that analysis to understand what’s missing, what’s the concern,” noted Scheetz. “And today, with farmers, most of their decisions are made on productivity and costs. So, there are a lot of co-benefits that come with these practices, or perceived production risks or cost risks that have to be overcome.” The Promise of Regenerative Agriculture Consumer demand will also begin to drive more adoption as a larger proportion of the population understands the value of regenerative agriculture. ADM has seen an increase in consumer inquiries related to sustainable farming practices, and Scheetz noted that this will only grow as customers begin to recognize the importance of Scope 3 carbon emissions in the supply chain. “There’s this perfect storm of all of these industries looking for a carbon solution and being tied to the ingredients that we ultimately sell,” he explained. “And we do have a solution.” According to Batra, convincing food and agriculture companies to invest in regenerative policies will also mean acknowledging that to achieve these outcomes, the industry must focus on marrying practices that make sense for the growers with the new agriculture technologies. “At its core,” Scheetz noted, “regenerative agriculture is a good investment because ultimately, everyone depends on the land to produce the ingredients used to create whichever final product is put on the market.” Scheetz said regenerative agriculture is as important to the industry as it is to the environment. “The regenerative agriculture practices we’re trying to incentivize increase the resiliency in an ever-changing climate going forward,” he noted. “It’s a good investment ultimately for ourselves as well (as the farmers who) depend on the land used to produce the ingredients and the finished products.” While the research and science behind regenerative agriculture is expected to improve over the next few years, he said the industry can’t afford to wait. “Progress over perfection,” he said. “You cannot just scale up in 2030 to achieve the commitments you’ve ultimately made. It takes time, and the best way to learn is to engage on these programs.”  

  With the global compliance carbon market worth more than US$900 billion and the voluntary market forecasted to reach as much as $40 billion by 2030, there’s no shortage of opportunities in the market for trading carbon credits. This was a key takeaway behind the Growth of the Carbon Market – Considerations from Key Stakeholders panel at the BMO Capital Markets 18th annual Farm to Market Conference in New York. The panel led by Jonathan Hackett, Co-Head, BMO Energy Transition and Head, Sustainable Finance, provided an overview of the carbon markets, including how to make carbon credits more tangible and investible, and featured Alastair Handley, Special Advisor & Founder Emeritus, BMO Radicle; Andrea Gruza, Managing Partner, Bonnefield Financial; and Cameron Wallace, Strategic Operating Director, Land O'Lakes (Truterra). Assessing the Opportunities At a basic level, organizations that are making the effort to reduce greenhouse gas emissions or pull greenhouse gases out of the atmosphere in a way that can be verified to meet certain standards can create carbon credits. To create the carbon credit, the activity needs to be developed under an approved methodology, verified by a third party, and uniquely serialized on a registry. Ultimately, that serialized credit will be sold to an emitter that will retire the credit to offset their emissions. As Handley explained, carbon credits are used as incentives in carbon-producing industries like mining. But he also noted that carbon credits are often “misaligned and misunderstood,” which is why he said companies need to understand the cost, revenue opportunities and risks involved in carbon credit opportunities. “When we think about carbon credit opportunities back when we started (BMO) Radicle, it was pretty simple,” Handley said. “There was a market, there was a clear price signal, there were clear opportunities to create credits, and real clarity in what we needed to do to generate those credits. Then that expanded [from primary agriculture] into the oil and gas sector, renewable energy, forestry and regenerative agriculture. But within all of those, we saw a clear path to revenue with a high degree of certainty.”  Now, as the market has expanded, many industries find themselves on the leading edge of carbon credit development. With that comes an active debate on the best mechanisms to reduce carbon emissions. “There are certain ways to develop credits today depending on what jurisdiction you're in where it's very clear as to what you need to do to create those credits, and there are very clear price signals,” Handley said. “There are other markets that are emerging where it’s less clear. Like anything else from a business perspective, it’s about understanding the cost, the revenue opportunity, and the risk.”  The Canadian agriculture industry is a case in point, Gruza said. Bonnefield Financial holds about 1.4 billion of Canadian farmland assets, which it invests in on behalf of institutional investors such as pension funds. But Gruza pointed out that agricultural carbon credit trading is difficult because Canada doesn’t currently have a federal program in place. “Land-based credits are more likely in terms of conservation, biodiversity, or planting trees, as opposed to changing farming practices,” she said. "That's a bit of the problem because a lot of Canadian farmers should be credited for the really good practices they have. It's a combination of the fact that the market is nascent, and the technology is difficult to be able to monitor it. Once we crack those two things, the farming practices are really going to drive credit generation.” A New Scope When it comes to how companies are generating and investing in carbon credits within the value chain, Handley said the focus is largely on Scope 3 value chain interventions. That is, how companies are encouraging change within their supply chains. "If a company is trying to lower its Scope 3 emissions—through the production of a grain product they make, for example—they may go to a farm and say, we want you to undertake this activity and we're going to help you pay for cover crops. They're going to quantify what the associated emission reductions or removal are, and they're going to claim those as a reduction in their supply chain. It's not a credit, per se, but it is an emissions reduction or removal that has a tangible value that's applied through that intervention.” That’s what Bonnefield Financial advises its clients to focus on. Gruza said that while the institutional investors Bonnefield Financial works with are committed to net zero, they may not know how to approach the market. “We talked to some investors who are thinking about speculating in the carbon markets; they just want to get as much exposure as they can to these credits because they think that the price is going to take off. But I'd say it really is more of the Scope 3 value chain intervention because they need to know their portfolio of investments are not carbon emitters.” The quality of carbon credits is also a key factor. Truterra works with farmers and dairy producers to help them adopt regenerative farming practices. It also helps food companies address their sustainability commitments. Wallace said generating high-quality credits in agriculture requires two key elements. “You need some assurance that the practice is going to continue over time because agriculture credits are competing with credits from other engineered solutions, some of which have much longer durability guarantees,” Wallace said. The second element is technical support for farmers. “It needs to have an agronomic, economic and environmental benefit,” Wallace said. “If it only has an environmental benefit, then it's not going to be sustainable because farmers need it to benefit their yield and profitability. If we can find a way to bring those things together, then you'll start to see more scalable solutions.” The Road to 2030 Meeting the U.S. ambitious emissions reduction goals over the next seven years will be a huge undertaking. The opportunity for carbon markets touches every part of the food supply chain. While the opportunity is immense, so is the sense of urgency.  “We're seven years away from 2030, but that means companies have probably two or three years to figure it out,” Wallace said. “It takes a long time to have these conversations with farmers and get them to change practices and then to do all the work to turn that into a credit. Then you have to consider that a lot of companies are going to miss those targets. Then what happens to those companies? That's going to be a real test. There's a massive area of opportunity, but I think that there needs to be a greater sense of urgency for taking action.” That urgency comes with a cost. As Handley pointed out, the transition to net zero is estimated to cost $130 trillion by 2050. But not meeting these commitments could prove even more costly. “People are starting to hold companies accountable,” Handley said. “These carbon commitments are becoming more and more meaningful in the sense that they're going to carry more risk for companies that don't actually make their commitments. That's because you've got groups that are becoming much more active as shareholders in those companies. There's a potentially big financial hammer that will come, and then the regulatory hammer as well.”   

  Our annual Farm to Market Conference is an industry-leading event bringing together global leaders to discuss the future of the agriculture and food sector. This two-day event features investors and corporates from crop input production, agribusiness, protein, distribution and retail, consumer products and beverages.  Our experts provided insights into the challenges the agriculture and food sectors continue to experience during these times of volatility and acceleration of the transition to net zero. Hear from: Michael Cippoletti, Managing Director & Head of Food, Consumer & Retail Investment Banking Andrew Strelzik, BMO Senior Analyst covering Restaurants, Beverages, Agribusiness & Protein Erica T. Kuhlmann, Market Executive & Managing Director, Food, Consumer and Agribusiness Group of BMO Commercial Bank Michael Johns, Managing Director, Food, Consumer & Retail Joel Jackson, BMO Senior Analyst covering the crop input and chemical sectors Kelly Bania, Equity Research Analyst, Food Retail & Distribution Janine Sekulic, Managing Director and U.S. Head of Agriculture at BMO Commercial Bank

  In this episode from BMO Equity Research IN Tune Podcast, we are joined by BMO Capital Markets’ CEO & Group Head Dan Barclay as he moderates a discussion on the takeaways from BMO’s 18th Annual Farm to Market Conference across the food and agriculture value chain. Equity Research Analysts Kelly Bania, Joel Jackson, Doug Morrow, and Andrew Strelzik join Dan for an engaging discussion that includes commodity price volatility, inflation, ag tech, regenerative agriculture, and food waste and how all of this impacts equities in the sector.  Subscribe to this free podcast and never miss an episode or visit the BMO Equity Research website for more great episodes of IN Tune. Sustainability Leaders podcast is live on all major channels including Apple, Google and Spotify. BMO Equity Research disclosures