Soil health to de-risk lending and insurance: a pathway to carbon markets

Image Credit: Milada Vigerova (Unsplash)

Soil-based carbon markets may hold enormous potential, but by nature, they are pay-for-performance, requiring agricultural producers to undergo an expensive transition and some years of work before realizing any financial benefits.

It is widely acknowledged that soil health (in addition to sequestering carbon) significantly reduces the impacts of flood and drought in agriculture and makes farmers’ fields more resilient in the face of increasingly extreme weather events.^{1 2}

The risk-mitigation effects of soil health practices can unlock existing value for both public- and private-sector lenders and insurers. These potential savings justify offering upfront incentives, such as lower rates and better terms, to encourage the adoption of de-risking soil health practices³; which would get producers through the transition needed to access carbon and other “ecosystem service” / pay-for-performance markets.

Risk-informed pricing is a market-based path forward to pay for the transition to resilient, climate friendly, soil health practices, and can also address some of the challenges that carbon markets are ill-suited to address.

The benefits of soil health risk-mitigation incentives include:

• Deployable now and paid for by savings:
  • Existing risk related markets (lending, insurance, investment) can create incentives that producers can benefit from now.
  • The ability to assess the precise risk-mitigating value of soil health practices is rapidly increasing.^{4 5}
  • Agriculture debt is valued at $441.7 billion in 2021 according to the ERS⁶, with around $20 billion in new loans issued annually - even a marginal de-risking represents massive funding potential.
  • Taxpayer-subsidized crop insurance pays out an average of $9 billion per year, largely for flood and drought claims.^{7 8}

• Equitable Access & Compensation:
  • Any operation big enough to apply for a loan can benefit from risk-based incentives, so all sizes of operations can take advantage of these opportunities.
  • The risk-mitigation benefits of soil health (for example, increased water holding capacity and water infiltration rates) improve resilience across a broad range of regions and soil types⁹ (including where carbon sequestration potential may be limited).
  • Early soil health practice adopters can be rewarded now for the work they have already done, unlike under most current carbon markets schemes.

• Protects the Safety Net:
  • With increasing weather volatility, taxpayer-subsidized crop insurance costs have increased significantly over the past decade¹⁰ with no end in sight. Soil health practices have been found to mitigate yield losses,¹¹ in some cases dramatically,¹² and have been shown to consistently lower crop insurance payouts under drought,¹³ bending the cost curve back down.
  • Incentivizing a soil health risk-mitigation strategy, increasing resilience, is a direct way of ensuring farmer and food security in the face of a changing climate.

• A Path to Greater Prosperity:
  • Once the transition to soil health practices is incentivized and undertaken, in addition to greater on-farm resilience, the outcomes can enable participation in future pay-for-performance markets, like carbon and ecosystem services, which hold the promise of meaningfully increasing farmer profitability.

Some challenges for carbon markets:

• Time & Money:
  • The transition from conventional (soil eroding and carbon emitting) to “regenerative'' (soil building and carbon sequestering) takes some years to register conclusively, and the upfront cost to farmers is significant.
  • With carbon markets in the nascent stages of development, carbon credit prices are often too low and/or too volatile to incentivize the shift to regenerative management.

• Measurement:
  • There is a lack of consensus on methodology and consistency in soil testing today.
  • Both field sampling and lab testing lack the uniformity needed to build a scalable market in addition to the current high cost of soil testing.
  • The complexity of soil systems is ill-suited for our existing soil sampling systems (especially on larger farms), and remote sensing and other emerging technologies are still being coordinated and scaled.

• Permanence:
  • Weather and management changes can impact or even undo carbon sequestration, requiring on-going verification or assessment of long-term outcomes, and complicating payment systems.

• Equity:
  • Small farms will have little incentive to participate, continuing the structural economic suppression of smaller scale farming and ranching operations.
  • Regional soil, geographical and weather variances will make for a massively uneven distribution of the opportunities to access these markets.
  • Rewards the most degenerative producers (who are often the biggest industrial producers) first as the most degraded land is easiest to marginally improve.
  • Fails to provide any reward for producers who have been building soil and storing carbon for years.

• “Pay For Performance”:
  • Producers are only compensated through carbon markets after a verifiable amount of carbon has been sequestered, while funding is still needed upfront to finance the transition in management practices.

The soil carbon markets conversation has built broad interest from divergent stakeholders across the value chain and has already catalyzed a shift towards recognizing the essential, positive role our agricultural producers will play in coming climate mitigation strategies. We see the risk-mitigation value of soil health as the other half of the puzzle, with the power to unlock the capital needed to fund the transition to regenerative practices without overreliance on government funding, while addressing some of the unresolved issues associated with carbon markets.

Citations:

1. Union of Concerned Scientists, “Turning Soils into Sponges: How Farmers Can Fight Floods and Droughts”, August 2017, https://www.ucsusa.org/resources/turning-soils-sponges

2.  Elizabeth Creech, “Soil Health Practices for Mitigating Natural Disasters”, USDA-Natural Resources Conservation Service - Newsroom - Features, 2018, https://www.nrcs.usda.gov/wps/portal/nrcs/detail/national/newsroom/features/?cid=nrcseprd1384891

3. Land Core, “Building a Predictive Model of Risk”, March 2020, https://landcore.org/programs#risk-modeling-section

4.  Ibid.

5. AGree Economic & Environmental Risk Coalition, “Agricultural Finance”, 2020, https://foodandagpolicy.org/ag-finance/

6. U.S. Department of Agriculture, Economic Research Service, “Assets, Debt, and Wealth,” February 2021, https://www.ers.usda.gov/topics/farm-economy/farm-sector-income-finances/assets-debt-and-wealth/

7. U.S. Department of Agriculture, Risk Management Agency, “Crop Year Government Costs of Federal Crop Insurance Program,” March 2020, https://www.rma.usda.gov/-/media/RMA/AboutRMA/Program-Budget/19cygovcost

8. Claire O’Connor, Lara Bryant, “Covering Crops: How Federal Crop Insurance Program Reforms Can Reduce Costs, Empower Farms, and Protect Natural Resources”, Natural Resources Defense Council, December 2017, https://www.nrdc.org/sites/default/files/federal-crop-insurance-program-reforms-ip.pdf

9. “ Christopher W. Smith, “Effects on Soil Water Holding Capacity and Soil Water Retention Resulting from Soil Health Management Practices Implementation - A Review of the Literature Posted to the NRCS Soil Health Website as of 9/2016”, USDA-Natural Resources Conservation Service, March 2018, https://www.nrcs.usda.gov/wps/PA_NRCSConsumption/download?cid=nrcseprd1392812&ext=pdf

10. Jesse Tack, Keith H. Coble, and Barry Barnett, “Warming Temperatures Will Likely Induce Higher Premium Rates and Government Outlays for the US Crop Insurance Program,” January 20, 2017, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2902688

11. Jillian M Deines et al, “Satellites reveal a small positive yield effect from conservation tillage across the US Corn Belt,” Environmental Research Letters, 2019, https://iopscience.iop.org/article/10.1088/1748-9326/ab503b

12. Timothy Bowles et al, “Long-Term Evidence Shows that Crop-Rotation Diversification Increases Agricultural Resilience to Adverse Growing Conditions in North America,” 2020, https://www.sciencedirect.com/science/article/pii/S2590332220300889

13. Daniel A Kane et al, “Soil organic matter protects US maize yields and lowers crop insurance payouts under drought,” Yale School of the Environment, March 16, 2021, https://iopscience.iop.org/article/10.1088/1748-9326/abe492

About Land Core:

Land Core is an independent 501(c)3 organization with a mission to advance soil health policies and programs that create value for farmers, businesses and communities. The organization is building the missing infrastructure and market-based incentives that will make the rapid adoption and scalability of soil health possible. Land Core is known for its efficacy in US federal policy and its ability to build broad coalitions of support for soil health.