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Is Your Farm Ready to Earn Carbon Credits?

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Want to understand carbon markets? There are 3 things you need to know when considering carbon markets: the impact of capturing farm data, how carbon credits affect lease income, and the evolving value of carbon credits.

Carbon Markets

Recently Bayer and Nutrien added their names to a growing list of companies that will help farmers earn money for implementing practices that help sequester carbon.  Bayer and Nutrien join ESMC, Indigo, Nori, and others seeking to cash in on the emerging carbon market.  Indigo has stated publicly that they believe there is a $15 trillion dollar opportunity for farms to sequester carbon.

Regardless of the size of the market for carbon sequestration, most experts agree that the practices that sequester carbon also happen to be better for the overall health of the soil. Practices like no-till/strip-till, sub-surface application of nutrients, and the use of cover crops among others help increase organic matter, reduce erosion, and improve soil resilience in addition to sequestering carbon.  So, what should you know about this market and the implementation of these practices?

Most importantly, realize that there is broad support for the adoption of practices that sequester carbon, and regardless of whether or not carbon markets gain traction, the practices they promote are widely accepted as positive for the long-term health of your farm. Regardless of the long-term success of carbon markets, you should take an interest in the practices your farmer deploys on your farm.

Here are 3 things to pay attention to as it relates to carbon markets:

  1. Capturing farm data.  Having good records and accurate data is the gateway to participating in carbon markets, so ensure your lease has a clause that requires your farmer to share the data required to qualify for earning carbon credits.  Carbon markets work by rewarding the implementation of practices that sequester more carbon than the status quo.  This change, or the adoption of new practices to store additional carbon, is the credit companies buy to offset the carbon that they generate.  To earn a credit a farmer or landowner must prove that they have implemented a practice that sequesters carbon, underscoring the importance of capturing quality farm data.  Here are three ways data can impact you as it relates to carbon markets:
    • Enrollment:  Before you can enroll in any program you must have a baseline of what practices have been previously used on the farm.  Some programs allow for backdating the adoption of practices to earn credits and others do not, but regardless of when you start you must have data to establish a baseline.
    • Continuity: If at any time you switch farmers, you need to provide the new farmer with the historical records outlining what practices were previously implemented on the farm.  It is also important for the farmer to know which program if any the farm has been enrolled in so that they can continue maintaining the previous practices and earn credits.  As of today, there is no way to transfer between programs. 
    • Asset Value:  If carbon markets are successful, they will have an impact on the value of your farm.  If you ever plan to sell the farm, or want the option, you will need records of participation or non-participation in carbon credit markets for the farm to be valued fairly. 

2. Impact of carbon credits on lease income.  How should you incorporate the revenue from carbon credits into your lease agreement?  There is not an easy answer to this question, and the answer depends on what type of lease arrangement you currently have with your farmer.

      • Cash Lease.  A competitive cash lease should take into account market conditions.  If people are competing to rent your property they will consider the potential income from all sources in their offer, including carbon credits. It is important to set expectations for renewal with a farm plan so that your farmer feels comfortable taking the risk to implement these practice changes.  This does put the burden on you to renegotiate with your farmer periodically and be knowledgeable about how carbon credits are impacting cash rent trends, as their value does fluctuate.  You should also remember that the adoption of these practices is good for the long-term health of your farm, so you should encourage their adoption.
      • Crop Share/Flex Lease.  If you are in a crop share or a flex lease, carbon credits should be considered as another source of income that is shared between landowner and farmer.  If adopting these practices is particularly important to you, or you speculate that carbon markets may take-off, then an agreement with a revenue sharing component may be a good fit.  Generally we encourage people that are not industry experts to avoid crop share arrangements due to their complexity, but a flex lease can provide shared rewards. They can incentivize your farmer to adopt regenerative ag practices and enable you to share in the upside of both the carbon credits and the improved asset value that results from the adoption of sustainable practices.  Tillable has developed a flex lease specifically for this purpose, you can read more about it here.

     

3. Evolving value of carbon credits.  The long term success of carbon markets is unknown, but they are gaining substantial momentum and most industry players now offer some type of solution.  Today, carbon credits range from $15-20/ton, but there is speculation that the price could grow to as much as $50/ton.  Perhaps more importantly, the practices they promote will have a very real impact on the value of your farm, as there is now increased focus on the long-term benefits that these practices create. A more resilient farm with high organic matter should sell for more because it is more productive and has lower input costs.  However, if you ever plan to cash in, make sure you have the data to prove it.

If you are interested in this subject, here are some additional articles you can read:

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