285 Paul McMahon - With over $500M invested, the regenerative edge is 1-3%

A conversation with Paul McMahon, co-founder of SLM, about why it makes so much sense to put money to work in real regenerative agriculture, yields, and more importantly, profits and the regenerative edge, and more.

Few papers in regenerative agriculture have been shared more than the Investment Case for Ecological Agriculture written by Paul McMahon. We have shared it countless times, learned a whole lot from the simple investment terms describing why it makes so much sense to put money to work in real regeneration. Now it has been updated, even better, it has been completely rewritten and with a lot more science and a lot experience from the field. 

In the conversation with one of the most experienced regenerative farmland investors, we explore the modules of our recent video course on why we need to change agriculture and food systems urgently, and why now is the time to do it.

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The above references an opinion and is for information and educational purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.

https://foodhub.nl/en/opleidingen/your-path-forward-in-regenerative-food-and-agriculture/

Transcript

Speaker 1: 0:19

Few papers in the regenerative agriculture space have been shared more than the investment case for ecological agriculture written by Paul McMahon, the co-founder of SLM Partners, in 2016. I've shared it countless times, learned a lot from it from the simple investment terms describing why it makes so much sense to put money to work in real Regen ag. Now it's been updated or, even better, completely rewritten, with a lot more science and a lot more experience from the field. Join me in a conversation with one of the most experienced Regen farm investors out there when we explore the modules of our recent video course on why we need to change agriculture and the food system urgently and why the time is now to do it. And yes, we talk about yields. And yes, we talk about, more importantly, profits and the regenerative edge which is real. This is the investing in regenerative agriculture and food podcast investing as if the planet mattered, where we talk to the pioneers in the regenerative food and agriculture space to learn more on how to put our money to work to regenerate soil, people, local communities and ecosystems, while making an appropriate and fair return. Why my focus on soil and regeneration? Because so many of the pressing issues we face today have their roots in how we treat our land, energy, grow our food, what we eat, where and consume, and it's time that we as investors big and small and consumers, start paying much more attention to the dirt slash soil underneath our feet. To make it easy for fans to support our work, we launched our membership community and so many of you have joined us as a member. Thank you, if your work created value for you and if you have the means and only if you have the means consider joining us. Find out more on comroadcom slash investing in Regen Ag that is, comroadcom slash investing in Regen Ag or find the link below Today, a very special episode.

Speaker 1: 2:27

This is part of the series of interviews where we unpack our video course, which we relaunched recently. I'm delighted to have Paul McMahon back on the show because it would have been impossible to record the first few urgency modules where we talk about why we should act now and fundamentally change agriculture and food, and why we can act now. It would have been impossible without the white paper he wrote in 2016 and now recently rewrote. We interviewed him first in November 2016. It was the third interview ever on the podcast. Then he came back in November 21 and, I'm very happy, in February 2024, to have him back, just after the new white paper has been launched by SLM, which, of course, will link below. I'm very happy to have you back here, paul. Welcome third time, as a charm.

Speaker 2: 3:12

Thank you, congrats, you're back again.

Speaker 1: 3:16

You just come off a launch of a white paper. It's being shared a lot online. I think you had more than 250 people on the webinar to launch it and that has changed quite dramatically compared to 2016. Do you remember the launch of the first white paper?

Speaker 2: 3:32

Yeah, it was very much what you call a stealth launch, a soft launch. I think back then no one was really talking about which type of agriculture. The term barely existed. It's had some very small circles.

Speaker 1: 3:45

And the white paper is called differently, like ecological agriculture. I think we call the best.

Speaker 2: 3:49

In case of ecological farming, we did reference for general agriculture as well within the first page. I think they're interchangeable terms. Back then no one was really talking about this outside of maybe a few very much pioneering farmer circles, really Very much on the ground innovators who were doing interesting things, but it hadn't really bubbled up, I would say, to the general food system level or even the certain investor level yet. So that's what we wrote. It was trying to bring to light some of the exciting developments that were happening on the ground, highlight some of the problems with the conventional food system, but then point forward really to some solutions, and exciting solutions which are good for the planet but could also be a good investment opportunity as well.

Speaker 1: 4:31

And to start with that piece of why we should act now to change the current food system or the conventional A lot of people don't like the term let's say the extractive, non regenerative food system and agricultural system. We have now compared to the first white paper and now I think, like what has changed in terms of just, I mean, a lot of things got worse and a lot of things got more extreme. But like, have fundamental points changed in your view as you wrote and updated the white paper and redid it, like that piece on the urgency? Has that shifted?

Speaker 2: 5:04

I think there's yet more research as an awareness of some of the issues around the current food systems, and we break it down to five major themes. So one is around soil health and the gradual degradation of soils around the world. I think that theme has continues to be reinforced. To be honest, we see some exaggeration, though that as well, like there's just a quote from the FAO that we only have six years left of harvest, and I don't buy that. I think some of that is a little bit exaggerated. I think you lose credibility and people use factual.

Speaker 1: 5:36

Yeah, we looked for that. Actually, it's difficult to find there's a Reuters article and then it's very difficult to find source for that, but I put it in the course, not because of that quote, because it depends where you are. Context is probably a bit too much, but there's an underlying. There's a sentence underneath, which since then has also disappeared, like luckily I took a screenshot that it takes 10,000 years to build, I think, an inch of topsoil or something like that and, yeah, which we also know is wrong exactly. So I think that's more interesting sentence.

Speaker 2: 6:04

Actually, I think that the so there's a certain environmental doomongering going on, and I think we need to guard against that as well. So I think we do lose credibility with scientists and with farmers if you go too far, but at the same time, there's plenty of evidence showing that there are real issues of how our soil has been degraded and losing its biological life. I think there was a great recent paper on this, I think published in Nature, where they show that I think a third of the world's crop land would be degraded and useless within 200 years. So it's not six years, but still 200 years isn't is a silver blip in time in human history. So there's definitely a real problem there, and we all know it needs to be addressed around soil health.

Speaker 2: 6:44

I think the second theme of course we've probably got even more attention over the last eight years is climate change and both the role of agriculture as a major source of emissions. So I think about 24% of human greenhouse gas emissions are associated with agriculture either directly or indirectly, and so there's a huge urgency now imperative about reducing those emissions. But on the flip side, there's, I think, increasing recognition of the role agriculture can play in storing carbon in soils, in landscapes. I think that has really evolved and developed a lot since 2016. I think back then IBCC and other kind of policy making for agriculture for her she weren't really mentioned and they weren't in the picture, but I think since then there's been real recognition that nature based solutions agriculture, soils can play an important role in mitigating climate change. So that's been great to see and there's just a lot more science to back it up. I think the third area about biodiversity, that's come on a lot.

Speaker 2: 7:41

You know, I think again eight years ago, last few years and even the last three years, I think it's been an explosive interest in biodiversity, recognition of the problem of biodiversity loss. You know this is six mass extinction we're going through and I think there's some research showing that agriculture is responsible for probably 85% of the biodiversity loss. But there's also, I think, a recognition that regenerative agriculture, where we manage our landscapes, can help restore that biodiversity, conserve habitats and help, you know, turn that around. So, yeah, biodiversity has really picked up steam. I'd say. You know as an important topic the fourth round water. I'd say that's probably been, you know that's been well known. You know both the issues with the use of freshwater resources for irrigation and over extraction, you know certain water basins, but also the issue with nutrient runoff and dead zones that go for Mexico, and you know that's, I think, well known. And I think we didn't find maybe a whole lot of new research, just more probably good examples of regenerative farming systems that can deliver the improvements you want, I think.

Speaker 2: 8:42

Then, the fifth area though I think again has come on quite a bit is the recognition of the poor quality of a lot of our food today.

Speaker 2: 8:49

You know the nutritional dumbing down of our foods over the past 50 to 80 years and the lack of minerals and vitamins and other micronutrients, the impact second half of human health, and that's partly because of plant breeding and the way we grow our animals, but it's also because of again go back to those lifeless, chemical dependent soils. We don't have to help the ecosystem of microbes or fungi, bacteria, which actually deliver these micronutrients of plants which we can then eat. And so I think there's this amazing book came out by Professor David Montgomery and his wife and Beakley on what your food ate. I think you interviewed him recently and I think he synthesized, you know, a lot of the research, and that's still a very new field, an emerging field. We think there's huge potential, though, as we understand the differences in different types of food and how the healthy food is linked to healthy soils and therefore to healthy humans as well. So, yeah, so I think we've just confirming the original themes, but trying to highlight the new research which has come out on each of those areas.

Speaker 1: 9:57

Yeah, it's been fascinating to see. Going back also when we remade the video course and going back to the original white paper you wrote, but also going back to our original video course, we saw that the nutrient density or quality discussion and connection to soil was actually quite present already in your original white paper. I remember seeing what you wrote on why that's the case, why we think it's the case, because it wasn't so much researched yet, because it was way before. But when I looked at what interviews we've recorded back then at the time and now I mean we've done two full series on it, we've had Anne and David on and of course we had a lot of scientists on as well. So that seems to have really at least moved more into the spotlight still not common knowledge. I think we shouldn't expect that everybody read that book, especially people who work in the health sector, and thus it doesn't necessarily translate to more revenue for farmers or paid for quality or something like that. I think there's a huge gap there to what we now know and what means on the ground every day for your pistachios, for your almonds and for beef and grain etc. I mean there's a huge gap, but I think we're going to see a lot if you update this again or write a new one in four or five years. I think there will be hopefully some examples where we start to connect that and actually have a flow of capital that makes sense for farmers or landowners or investors etc. That can show that their quality is fundamentally different.

Speaker 1: 11:25

But I was surprised how little we paid attention to it. We mentioned it was an important module in the first video course. We did, but it wasn't. We just didn't have a lot of episodes to refer to because we just didn't have a lot of people to talk to in that. And that has changed significantly over the last couple of years.

Speaker 1: 11:43

Another one do you see that narrative in the biodiversity piece? I don't know, I feel like a number of years ago, but maybe the bubble was just a bit different there was a lot of discussion of this sparing versus and intensifying and sparing. So if we just intensify the current agriculture system we can produce more on less land and then leave the rest to nature, whatever that means. That sort of seems to have sort of moved away a bit or at least be less present, but still the narrative of combining having nature and a lot of biodiversity on productive land seems still very far away from many people to grasp that. Do you feel that is a strong narrative that is holding us back, because many people simply cannot imagine that there could be biodiversity on a productive farm.

Speaker 2: 12:30

Yeah, I think it's still a pretty hot contested, hotly contested subject. You know that landsmary versus land sharing, and I think we've seen it pushed by certain business models as well, for example the kind of vertical farming or lab based meats and more technological food production systems kind of latch onto that. If you can take land out of agriculture production, that's going to be good for nature and, of course, by definition.

Speaker 1: 12:54

That's also sense. That's interesting.

Speaker 2: 12:57

And of course there's a real value to conserving natural areas, natural habits, that we have left them in the planet.

Speaker 2: 13:04

But as our views, we don't want to then just put all our focus on those areas and exclude the majority of land which is farmed, whether for crops or for livestock. You know, and that is most of the planet. It is affected by human management and we think there's massive potential there to change how those lands are managed in such a way to increase biodiversity on farms and productive lands, you know. So it's really, I think, both.

Speaker 2: 13:29

You know we conserve the natural habits we have, but then we don't give up on the productive areas, you know, and we can do things improve again. Healthy soil, biologically active soils, is the foundation and that can, and reducing chemical pesticide use can support insects because they're birdlife, flora, fauna, and all the up through the the pyramid, you know the species pyramid. So, yeah, we think, we think that a lot more research is required on that, of course as well, because one thing we've seen by diversity is quite hard to measure and report on, it can be very expensive to do it well, and so I think there's still, we're still lacking some of the data, I suppose, to really weigh up the impacts and the tradeoffs you know of these different approaches.

Speaker 1: 14:11

And in your conversations with investors, because you have a lot of them, those, I mean, you have a lot of those conversations. What has changed over the last years, has it like is the interest, how's the how's the tone? Let's say, the conversation changed and are they actually wiring money? Because the tone can change, but if people are not wiring, we're not getting anywhere. What has shifted? Has something shifted there, finally, or are we still very early?

Speaker 2: 14:38

Yeah, well, I think one thing we've seen over the last two to three years regenerative agriculture has become a whole topic. You know everyone's are talking about it, whether it's it's farmers, it's food companies, it's governments or it's investor managers or investors. So there's a huge exposure of interest in the topic and I think that's led to a certain kind of confusion amongst investors because they don't know really what the topic means. You know there isn't a commonly accepted definition what, what is regenerative agriculture? And I think also they get you more confused because there's two almost risks I think we see with the current conversation with regenerative agriculture. On the one side, this can be a certain amount of hype, like people almost overselling the power of regenerative agriculture claim you can address climate change, you can solve all environmental problems, but also it can be 20 or 30 best opportunities.

Speaker 1: 15:29

You producing the adventure type returns.

Speaker 2: 15:31

So I think I think some of those claims can can be a little bit misleading. On the other hand, we see quite a bit of greenwashing where we have, let's say, more conventional producers, farmers, investors or managers claiming to be regenerative and putting that regenerative label on what they're doing. And in many cases they're not doing anything different from before. It's still sort of business as usual. All they're changing is how they. They maybe measure, report on what they're doing. But I think that can weaken, let's say, the term regenerative agriculture. If you know everything has always been regenerative, then why bother trying to change anything? So I, yeah, so I have some sympathy for investors who come into space at the first time that they. There's a lack of definition. There's hype at one side, greenwashing the other, and one of the main reasons you wrote the white paper was to help investors navigate through this sort of these perilous waters.

Speaker 1: 16:25

You know and get to the other side and understand the potential of greenback culture, but also some of the risks and challenges you know and and come into it in very kind of clear-headed, sort of realistic way yeah, no, there's definitely the risk of a lot of large land investors, specifically, or land funds, that suddenly, like like a few years ago, suddenly they put all their stgs everywhere and they were suddenly also working on water and they were working on this and working on that, and now, of course, funds are being renamed and names pop up left and right and and all they do is maybe be slightly less bad or like on this, like working on sustainability instead of going through, which is super difficult. Let's not, let's not underestimate and the shifts, but they cannot all be working on regenerative then we'll be at 20, 30, 40 percent of the land and that's impossible. And so there, something must be off there.

Speaker 2: 17:15

Yeah and just. But I think the good news is we have seen a lot more real interest among investors.

Speaker 2: 17:20

You know who have grown to step through this landscape and people are making commitments. You know, like our, just looking at our business. You know we started in 2009,. You know, as a very pure play asset manager focused in the financial industry, we raised our first fund in Australia in 2012. It took us many, many years, you know, to have hard work to build a business, but I think we're now managed over $580 million around the world through funds and separate accounts and we're investing in three continents in Australia, europe and the US and a lot of that growth has come in the last two or three years like it's been quite exponential.

Speaker 1: 17:56

And do you see that doubling again? I mean I'm not going to ask the billion dollar question, but do you see like a clear path, like if you would have the same amount of money in a couple of years, you could put that to work, even though it's not that you put 10 billion 10 billion to work easily, but a few hundred million more is their space for that.

Speaker 2: 18:14

Completely and I think because we've taken the time to build our implementation capacity in each geography, so we've got people on the ground with connections to farmers, with who we can definitely opportunity. So we kind of build it from the ground up and then try and find the capital to match that. So I think you have the opportunities out there and we do see we continue growth and ability to scale. I think there's increasing investor interest as well. It's driven by two things. So one is you know what we do.

Speaker 2: 18:39

We focus on real assets and farmland investing and we're seeing increasing investor interest in real assets as a part of their portfolio. So it's almost a financial motivation. They like the diversification, the lack of correlation of the asset class, the income yield, the downside protection, the inflation hedging. So people making allocations to real assets within that may be allocated to farmland and forestry. You know more than you know 10 years ago for sure. So that's the reason. But the second is really around impact and commitments that investors are making on around nature and natural capital, climate, biodiversity, and investing in regerib agriculture is a way in which they could deliver on some of those commitments and help with their reporting and their alignment with sort of global initiative.

Speaker 2: 19:21

So those financial impact motivations I think are often where they overlap, is where we see a lot of investor interest and the kinds of strategies that we develop and is it more institutional or more private, as in family offices, and I mean they can also become institutional, but let's say that the private wealth side or institutional space, pension funds and things like that- I think it's a big, I think of our, the capital we manage, if you add a little bit for me, three quarters institutional capital, so we manage money on behalf of large insurance companies, pension funds, and then we also work on a number of family offices as well, from from big to small, and so I think there's yeah, there's interest in all those types of investors in this space.

Speaker 1: 20:05

And you mentioned something before we work from the ground up and in the current White Paper was very clear the scarcity of farmers like that's the big and we hear that constantly the amount of landowners I know that would welcome an experienced region farmer on their land or would, or investors that would love to go invest with experienced region farmers, etc. Etc. They're able to talk, invest, the language, manage large scale, a state, etc. And there's a lot of work for them. Let's say how do you first of all, how did you identify that from the beginning and how do you mitigate them? Yeah, now.

Speaker 2: 20:39

I think that that's the other thing we tried to do in this White Paper was to really draw on the lessons that we've learned over the last sort of 10 plus years investing in general agriculture around the world, and I say the number one thing we've learned is the importance of partnering with the right local farmers. I think we always knew this would be, you know, a key factor, but I think our actual experience in the ground is just as just emphasise and cemented that, because there aren't, you know this type reject well first. I think the first one is farming is a tough business, you know. So farming well and I need type is hard, requires a very skilled person.

Speaker 1: 21:18

There are few very successful farmers in general, that's just yeah.

Speaker 2: 21:22

And they need this amazing combination of skills from from agronomy to ecology, to mechanic, to marketer, to kind of team leader, ceo, and it's incredible mixture of skills.

Speaker 2: 21:34

So finding a good farmer is hard in the first place, but farming, which generally is particularly hard because it typically it often requires a higher level of knowledge and skills and understanding of the interaction of these ecological, biological processes and how to harness them. So it's an even rarer and more specialized group and we found it's hard to create those farmers you know and to train. I think that, of course, is a huge need for training, but our business model has focused more and more over time and finding existing regenerative, organic farmers who have done it for a while and who want to scale, and then we try and back them and help them expand. That's the way I think we've been able to de risk the strategies for our investors. Absolutely, we need training, we need new farmers as well and we do lots of things to help that indirectly, but it's almost. Maybe it's more philanthropic capital and government back initiatives that they can. They can drive that. Our focus is helping helping existing regenerative farmers scale up.

Speaker 1: 22:31

Yeah, and through that, indirectly, you will train the next generation as well. Like, do we need this larger? And some people are going to email me now but we need this larger, professionally run, investor backed farms as training ground for a lot more other farmers that are going to run other operations and are going to be investor backed or invested by x y, z, because otherwise where else can you learn this at scale and with with investor communication and with which is a very different thing than running your family farm? With all respect, but it's a very different, different piece. If you have investors to communicate with that live very far away and have no clue what you're doing on the land, and so that scarcity as it's like, has it become easier to find these farmers in the hops you're working or has? It is a constant challenge, and whenever you find one, you jump on the opportunity to buy the neighbor and help him or her.

Speaker 2: 23:25

I think there's a, there is a shift going on within the farming community.

Speaker 2: 23:29

There's a much greater openness to these regenerative farming practices and ideas than there was even 10 years ago.

Speaker 2: 23:37

You know, if you look, for example, organic farming almost as a subset of regenerative agriculture like that's in case in point, where you know organic food sales, and as 6% of total food sales, it's, it's a significant part of markets.

Speaker 2: 23:49

It's, you know, maybe 20 years ago was seen as something for, you know, kind of hippies or hobby farmers, environmentalists, but now what you see is that it's a proper business and real farmers, you know, are actively involved, and so I think there's there's definitely great interest in this amongst farmers. They also because they struggle. They struggle with high input costs, with price of the can control, with very small margins and a lot of risk, and so I think the good farmers are always looking for ways to reduce costs, decommodify the production, you know, and seeking higher margin business lines, and that's a regenerative organic, you know, can maybe deliver that. So I think you know there's definitely a greater pool to draw from, but it's still not the mainstream, you know. So you still have to be very selective and put a lot of work into, get get on the ground and build relationships and find good farmers to work with.

Speaker 1: 24:38

And then you mentioned something fascinating in the current white paper, the regenerative edge, which for sure is going to be shared widely and people are going to be very happy that they saw that like can you, can you walk us through what what leads to and why you called it the regenerative edge?

Speaker 2: 24:54

Yeah. So I think the white paper maybe less than half of papers are more on the science and the impacts and what we've talked about so far, but the other half is very much around the investment case, you know, and trying to show that regenerative farming can be economically better for the farmer but also for investors who support, you know, that farmer, and I think there's a number of ways that those higher returns or higher, better economics can be achieved. The number of levers you can pull, you know. On the one hand it can be through higher yields and we certainly see that certain cases were increasing production on the land through your regenerative practices.

Speaker 1: 25:29

Oh, now I have to interrupt you, Like we're not all going to start when we move to regenerative agriculture.

Speaker 1: 25:35

Sorry, my narrative is very interesting here because the yield is like we're recording this as farmers are protesting in all over Europe and other places. Let's interrupt. Okay, we're going to come back to the investment case. But the yields you say a very interesting line as well. There's no single story on yield. Let's back that a bit and then we're going to come back to the investment case. So when investors because I'm just playing devil's advocate here say yeah, but what about yield? What do you normally answer to them? I'm asking for a friend.

Speaker 2: 26:04

Yeah, and this paper I think we do take quite a nuance approach. You know, I think it's all context specific. It depends on local ecosystems, local markets, what you're growing, the practices that you're using. So there isn't a single story here. There's absolutely examples of regenerative farming practices which improve soil health and prove soil organic matter lead to higher yields. So we have plenty of case studies there around the world of that. We see in particular in grazing systems, actually livestock pastures, livestock systems. By using types of rotational grazing to buy land up in the smaller fields, using fencing, water points and manage grazing, you can increase the carrying capacity. So carry more animals on the same grass and that's an ethnic amount we've seen Well, significantly. Yeah, we've seen increases of 50% plus carrying capacity increases.

Speaker 1: 26:51

And even anecdotally I've heard way more as well which we need more research to go into. But that's, that's an in like just realizing that that's possible. How far we can push it is a second, but that's possible without a lot of inputs or potentially without any inputs and restoring pastureland and all the biodiversity stuff that comes with this. You've seen fascinating research coming out of that. Plus the carbon piece which is being researched often like. But even just the carrying capacity goes up, which means more calories per hectare acre, whatever you're measuring.

Speaker 2: 27:21

Exactly, and it takes maybe some capital expenditure, some capex, you know, infrastructure, but the actual Investment input costs are extremely low.

Speaker 2: 27:29

So, yeah, we think it's great potential in grazing systems. I think, though, when it comes to other regenerative farming systems such as organic, it's not. That isn't. It isn't always the case. You know, we do see some of some slightly panglossian claims that you know, organic farming has the same yields and there are some crops where yields can get pretty close. So I'll file for all of us.

Speaker 2: 27:48

For example, we have some organic yields being similar to conventional, but you know, if you look at the mainstream, the traditional grain crops and many orchard crops, yields are lower.

Speaker 2: 27:58

You know, we see that we invest heavily in organic grains in the US Midwest and we typically see yield gaps of 15 to 20%, maybe 25% on corn, soybeans, wheat, you know, depending on the exact system of the farmers approach. So there are yield gaps, you know, for many organic systems. So it's not one answer in yield and so definitely some opportunities to improve other maybe yields might even might be the same, others they might go down. But I think was intimate agriculture in a way that doesn't matter. I mean, that's not the farmers gold, and one of the issues or one of the reasons for whichever agriculture has emerged is almost reaction against that productive as mindset which dominated agriculture for so long, where farmers are being told to just maximize yield per hectare only thing that matters and pumping inputs and get the most yield, and you're, you could hold your head up high at the farmer conference because you won the.

Speaker 2: 28:51

That year is the record yeah, bushels per acre. Whereas actually I think the regenerative farmers are realizing it's not about yield per hectares but profit per hectare, and so they're, they're looking to optimize yield rather than to maximize yield. Which gets you to the other levers, and I think this, the second key lever, was either generative. That regenerative edge on the economic side is around costs, like trying to reduce input costs, and that's a massive concern. As we know, farmers faced, you know, doubling or tripling of fertilizer prices over the last couple of years because of the situation in Russian invasion, ukraine, and we've seen spikes in fuel prices. We've seen increases in agrochemical costs.

Speaker 1: 29:28

So these costs are massive, like there's no. I mean maybe a bit, etc. But there's once they go up well, very like. Fuel prices are very difficult to push down, and agrochemicals is not. That suddenly companies are like oh, let's give some discounts, right.

Speaker 2: 29:44

They have come down quite a bit, just like to be fair, the last couple years of fertilizer. People are down. So and your cyclical markets, but we do. We do tend to see a certain stickiness, in particular in things like seeds and chemicals, more branded products, where often it's hard for the farmers to get the benefits of the downturns in the cycles. They always need to be struggling with the the upticks in pricing.

Speaker 1: 30:04

Yeah, so reducing input costs. Like fertilizer fuels, they tend to be more connected to your global price, but your branded seeds just are not so global and will stick upwards.

Speaker 2: 30:16

So if you can reduce your use of chemical fertilizers or pesticides, of GMO seeds, and instead you can use compost manures, grow cover crops, grow your fertility, you know, do integrated pest management and reduce those input costs, that that can make a big input on a big impact on profits. A third thing we see, though, levers around premium pricing. You know, can you actually achieve a better pricing for product by by selling to premium markets? Again, organic is the most developed example of that where, as I mentioned before, organic food markets are large machine in Europe and USA they're growing strongly. The consumer there is a strong consumer awareness of organic certification and willingness to pay a premium and there's some very strong premiums being delivered back to farmers at the farm gate. That depends on product and we have a chart in the white paper where you might see US corn selling for an 80% premium for organics. Us blueberries are now more like a 0% premium because there's been oversupplied.

Speaker 1: 31:15

So each market has its own supply demand dynamics. That's massive, like even if you have a 10, 15, 20% yield drop which might slowly close, or some years, you're actually better. I mean, that doesn't mean it's a permanent one. You've massively lower costs over years or even same costs, and you get a premium of 80%. That's going to change your year quite significantly.

Speaker 2: 31:39

Yeah, and there's research just coming out from University of Illinois actually looking at the farm predicted farm budgets for corn soybean growers in Illinois over 2024. And they're predicting that conventional growers average conventional growers will lose money per acre. Whereas we look at our organic farmers, their budgets, you know they're making probably $400 or $500 per acre profit versus the loss of the conventional side. So there's a stark difference at the moment with current organic versus conventional pricing. So that's another reason for the edge is that there's higher product prices. I think a fourth reliever which is developed in quite quickly we see around the world is around payments, recassus and services. In particular, carbon is the most developed, but maybe we'll see it for biodiversity and water impacts as well. But if a farmer can have all these, create these environmental outcomes around soil, health and carbon by diversity, water, and then you get paid for the form of credits or offsets or some other payments, that's an extra revenue line in the farmers which is a well yeah, which is around 2%.

Speaker 1: 32:42

I think you like the extra payments you're envisioning. Has that happened outside Australia yet, because you clearly mentioned Australia's leading the way here? Have you seen that, with being active in three continents, have you been paid for any environmental services beyond Australia?

Speaker 2: 32:59

Yeah, we're working on North America, Europe and Australia. I will say Australia, we always say, is about 10 years ahead. I think we've sold over 1.7 tons of CO2 credits in Australia and generated over 20 million Australian dollars in revenues over the last five years. So it's a serious part of our business down there In the US. As we just did a pilot project in the US Midwest looking at the carbon impacts of converting conventional crop land to organic certification, Within the first year I think we generated about 1,500 credits from those farms. So that was a pilot project which we're just finishing up the results for that now. So we're just beginning to implement those systems in the US and we're now working a similar approach with our orchard farms actually in Spain.

Speaker 1: 33:48

With climate, farmers right.

Speaker 2: 33:49

We're working with climate farmers to develop new methodologies and potentially generate credits, probably more 2025 onwards.

Speaker 1: 33:57

So I think we're here yet right For orchards, like both the tree carbon and the soil carbon. I've yet to see, interestingly enough, work on that. Like in terms of carbon credits, it's much more. I just haven't seen that, I think, for perennial crops until now.

Speaker 2: 34:14

Yeah, it's been more neglected and what we looked all around and we didn't really see the methodologies and the schemes in place, which is why we're part of the climate farmers and we're co-funding with them to develop new methodologies which are relevant to Mediterranean orchard crops. I think there's also a rationale, there's an explanation for that. Probably your bang for your book is going to be lower on high value orchards. If you can store two to five tons CO2 per hectare on an orchard which might be worth 50,000 euros per hectare, and you sell your credits, maybe you're getting 20 years, 30 years per tonne. Maybe you're getting 100 years per hectare of extra revenue.

Speaker 2: 34:54

It's a nice thing, but it's not going to move the needle that much. If you can achieve one or two tons per hectare on land extensive wheat land, for example, in the high plains of the US, which is worth maybe $3,000 a hectare it can produce as much as it can be. So I think that's where we see the biggest lever, let's say, in returns is probably more in grazing land, more extensive cropping land and as you get the higher value irrigated orchard type land, the impact returns are slower. But we do something that's very important because it helps you measure and report your impact, because you're getting rigorous third party verified carbon accounting effectively, which is important for other reasons as well.

Speaker 1: 35:37

And it seems, especially in the last few years, the climate weirding is really getting weird. How much are investors holding back, or is that a part of their rationale to maybe not invest in agriculture at all, simply because it seems all difficult, even though maybe Regen offers an edge or an hedge to that? How much is the climate weirding part of your conversations, or not so much, because we see it constantly too warm, constantly too cold, constantly too wet, too dry, like every summer, wherever you live seems to be extreme at the moment, and that was in 2016,. Didn't feel like that yet, like it's definitely speeding up. Is that something you hear from the investor side?

Speaker 2: 36:19

Yeah, yeah, I think we do. We increasingly get that question. I think we have to separate in weather and climate, you know so farming has always been a weather dependent business and there's wet spells, there's dry spells. There's cyclicality and variability.

Speaker 1: 36:32

So you're still one in Australia. Remember you invested and I think if you went to do the worst dry spell ever, ever recorded for the first I don't remember how many years with the fund it's pretty nice it is not new, you're saying but I think what investors are increasingly cautious about and we are too is those long term changes in that weather through climate change.

Speaker 2: 36:55

So I think it's something we put a lot more effort into now than ever before, whenever we develop these strategies, that it's a top-down climate analysis looking at the climate change models, looking predictions, precipitation, rainfall, temperature.

Speaker 2: 37:09

It's particularly important with some of these orchard crops if you're planting an orchard for 20, 30 years and your almonds might need a particular number of chilly hours or there's a frost risk.

Speaker 2: 37:19

So, yeah, doing that our climate analysis is really one of the starting points now for all our strategies and be able to show that that region, your vesting, that crop or system, your vesting, is going to have at least a neutral or positive climate skew with climate change. But I think the other thing and this is going back to those levers of return to regenerative edge is using regenerative agriculture to increase resilience on farm, because if you can have healthier soils with more organic matter, storing water in the dry spells, absorbing water in the floods, it's going to help with resilience and take out some of the variability of production. And you've covered us a lot in your podcast over the years. But it's that risk mitigation, resilience, that comes from regenerative agriculture and can take out some of that, maybe fluctuations and profitability. So you put it all together, just going to back to you in terms of numbers, this regenerative edge what's?

Speaker 2: 38:09

the regenerate People are waiting. Sorry, I didn't come back to that. We see that you know that regenerative approach can maybe add like 1 to 3% to an IRR. That's typically what you see at the farm level when you're investing in real assets in a farm with itself, depending on kind of where you are and what system you're investing in. So it's certainly it's a very attractive, let's say, extra turn that investors can get by backing these regenerative systems.

Speaker 1: 38:35

And really peaking the context location, farm, farmer and crop really market really, really, really well, because otherwise you have a search stories of investors saying they did and landowners are saying that it all kinds of regenerative things and basically left everything to like went cold turkey with chemicals, left everything bit by themselves to develop, etc.

Speaker 1: 39:00

Etc. Etc. And then complain it didn't, it didn't work, whatever it was, and then work like, yeah, that's gonna hurt the story for a bit or that's gonna because it's very intense, like management is is in knowledge management and management of the land is very intense in any transition. And then we should not underestimate, underestimate that, but 1 to 3% is significant in real asset strategies to to be achieved. And if you look at the portfolio now or things you're looking at without revealing too much, like what's what part of the regenerative agriculture sphere excites you the most at the moment not blueberries, but what is like that's actually actually very, very exciting is the grain side, the animal side we'll get to animals because you cover quite a bit in the white paper, but what is? Or the orchard side of things.

Speaker 2: 39:50

Yes, a couple of areas we're working on now is the one is looking to invest in mixed farming systems in Australia, where we can also start carbon projects.

Speaker 2: 40:00

I think that's quite exciting because Australia is shout out to bird is pretty is very advanced when it comes to integrating livestock and cropping and that's something which we've sort of forgotten how to do and the US and many other parts of the world. But Australian farmers have a long tradition of integrating grazing into cropping systems and you can get some great benefits for wheat control and nutrient recycling and really regenerative impacts. But also we see some big potential soil carbon increases and how you manage such a perennial pastures within those systems and the Australian carbon market is very developed now so we feel we can underwrite generation sale of credits so it can be again. Add that to 3% maybe to the return from the strategies. That's something we're launching now and developing with our local partner, impact Ag, so that's something that's big focus in the next couple of years.

Speaker 1: 40:48

What kind of system would it be like? Permanent pasture with row crops in it, permanent pasture with perennials? How do you see that so?

Speaker 2: 40:57

we just bought a large farm in New South Wales which has I think it's about, you know over 3,500 hectares and it's about a third dryland cropping, a third perennial pasture, a third more native vegetation. So you're getting these sort of mixed landscapes and you can use the animals. You know they're grazing the perennial pasture but also rotating through those cropping zones as well to get the beneficial impacts on the cropping part of the business as well, so optimizing that landscape use.

Speaker 1: 41:30

And so beyond that, you were continuing.

Speaker 2: 41:32

Yeah, I think the other thing we are doing a lot of work on orchard systems, both in California, on the west coast of the US, but also in Spain and Portugal, and we do think that, as the point you made earlier, that regenerative agriculture has sort of overlooked a little bit the orchard systems. You know there's more focus on annual cropping, arable systems or livestock systems, but we do think there's great potential in orchards you know, even quite commercial intensive orchards to take away some of the negative impacts of the high chemical use and soil degradation and instead use cover crops and compost and minimal till and even integrating livestock grazing and whole orchard recycling. A whole bunch of practices that can really improve soil health, change the carbon footprint quite a bit of those orchards and also potentially allow you to go fully organic. You know where you can get traction with premiums. So that's something we're actively working on in Europe and the US.

Speaker 1: 42:26

And then let's as a final piece or whatever we go to, but let's take on the livestock piece, because you have quite a significant sort of chapter or module in the white paper on livestock. I think in the last seven, eight years, since the last one came out, livestock has been intensely debated on all sides. We've seen a whole hype cycle, I think, of lab grown, plant based, which of course not the same meat which seems to deflate, collapse now a bit For sure had to explain 100,000 times why you invest in livestock as an impact investor. So what made you put livestock so significantly, let's say, in the white paper?

Speaker 2: 43:09

now, yeah, it's a question we get all the time, you know, from investors and others, and so we want to step back a bit and almost explain what's the case for well managed pasture, raised livestock, you know, and how they can have very positive impacts, and I think you know there is.

Speaker 2: 43:24

It's a very highly contested area and when the scientific community because since we wrote our first white paper 2016, they were then a number of very critical reports, sort of painting livestock, in particular cattle, as sort of our mental villains because of the methane and other emissions associated with them.

Speaker 2: 43:40

But I think there has been a bit of a swinging back at the pendulum, you know, as other reports now we've come out trying to understand the impacts of livestock within a system, you know, looking at the ability to store carbon and soils as it to offset some of those emissions, but also the ability of livestock to use areas of land we can't use around here else. You know they can consume grasses, which humans cannot, and turn into a very healthy nutrition product, and so they allow us to make use of areas of land which can actually help conserve, you could say, other natural areas, you know. So there and there's a food security angle, there's a human culture angle there as well. So we wanted to step back and I think our view is that. You know well managed livestock on pasture there's quite a few examples now where the soil carbon sequestration impacts can be very substantial and can go along with very substantial, very substantial.

Speaker 1: 44:34

I see some research coming out of the US which is very substantial, yeah, Questions, of course, around.

Speaker 2: 44:41

Does that apply to every ecosystem? Perm was not the same way. Would, you suppose, get saturated over time? Does the effect wear off? We lost open questions, but our view is we think we're only starting as well to touch the surface of research on this. So as these case studies get fully explored and synthesized, I think we'll see a bit of a shift where people do recognize that soil carbon storage can go a long way towards offsetting some of those methane emissions. And then I think it's looking at livestock and assistance point of view.

Speaker 2: 45:12

There's some great research came out of France recently where they actually model out a different European food system which is effectively cause organic, so taking out of nitrogen fertilizer, a lot of chemicals, using very organic regenerative systems. What would that food system look like? And they also actually spared 10% of farmland for Afar station, so taking land out of production. Their conclusion was you'd have a lot less cereals and because of that you'd have a lot, a lot less pigs and chickens, so monogastric animals. You'd have actually the same amount of cattle, because the cattle can make use of those natural grasslands and probably produce some great things.

Speaker 2: 45:51

And you can integrate into cropping systems and get to nutrition and we control benefits. So a truly regenerative system in our view actually really benefits some livestock. So, yes, we don't think they're environmental villains. It's a kind of trite phrase is the how, not the cow, and we think you have to look at inside more systems perspective to really understand the impacts.

Speaker 1: 46:10

Yeah, and I think there's. There's a piece on the methane as well which, as far as I understand, all the research, especially the super negative ones, obviously has been based on models and has been based on a K for operations where to be measured to a certain extent, of course, fed grain and cereals and things like that and the few things where we've seen it. I discussed it with Bert Glover as well a few years back like to actually research it on farm on a healthy pasture. To see the amount of methane a cow actually admits is very difficult and hasn't been done many. So the methane we see in those charged might be from a cave operation instead of from a healthy pasture. So maybe the methane is less or is different or has a different rule there. So both sides have to be researched, both the carbon side and the actual methane methane side. But it seems that the narrative is shifting slightly but still it's very strong, especially our world in data.

Speaker 1: 47:10

Or is that fancy graph where beef is like all the way outside the screen and the rest is you can better eat almonds and things like that, which are very healthy? Let's not. But the research is not just not show that it's outdated LCA is that shouldn't be used. Shouldn't be used for that. And then another one you mentioned, I think in two lines or something, in the white paper on vertical farms and other things that, let's say, have hyped over the last seven, eight years. What do you see there? Because you probably have to compete, sometimes at least for the investor attention to, because they fall in the same bucket as food and egg, but completely different, of course. Like what's your normal go to answer when investors is why should not just not invest in vertical farm? Xyz, compared to some things are complicated and far away in Australia.

Speaker 2: 47:57

Yeah, I think they're fundamentally different asset classes. If you're investing in farmland, appreciating natural asset is fundamentally different from investing in, effectively, a factory, a food factory, in steel and machinery which depreciates over time. So that's more for private equity, you could say strategy. So it could be different risk return profiles. That's the first thing I think. The second is what's the scalability of some of those models?

Speaker 2: 48:29

And we've certainly some successful vertical farming models growing high value leafy greens, tomatoes, very specialized crops where people will need to pay a premium for closest to market and freshness. But I've seen no evidence that it can ever scale to grow staple food crops. They're going to feed the world, so it's a very niche, specialized business. But I think it has been overhyped and I think we've seen the same some of the plant based meat products. We've seen the same at lab based meats. So I think there's a strange blurred line where, you know, marketing latches on to science and selectively uses science to simply to create a narrative around a business model and I think that can catch on. The media cover it and everyone gets on a bandwagon for a while and it takes a little bit of time for reality to sort of kick back in and people to realize that maybe some of those claims were overdone. I think we've seen that some of those more techy sectors over the last few years.

Speaker 1: 49:32

And talking about technology, there's this narrative, which we try to dispel, of course, constantly, but this regenerative agriculture is anti science and anti technology, like it's going back to whatever that we probably don't want to go back to plowing the field by hand. What do you, when you see that sort of look on an investor's face that they think, oh, this is, this is hippie stuff, what do you normally say? What do you? Do you get them on the farm? Or do you like? What do you? How do you counter that narrative of this anti science and anti technology and nice for hippies in a backyard?

Speaker 2: 50:06

Yeah, we certainly tackle in the white paper because, like we strongly make the claim that regenerative agriculture is based on the most advanced science. Like all the the pioneering discoveries and science over the last few years have all been around biology. You know the role of healthy soils and biologically, biologically active soils and how they can support productive farming systems. That's where all the advances have been taking place. You know it's. How do we we ourselves off the chemicals and use biology instead? And we even talk in a bigger picture. If you look at it like over hundreds of years, I think you can always see three different agriculture revolutions. You know the first revolution agriculture in the 19th century was around mechanization, so bigger tractors, reapers, harvesters, allowing farmers to farm big areas. The next phase, really the 20th century, was around chemicals, you know so, using synthetic nitrogen, fertilizers, agrochemical pesticides and then certain seeds which could make use of those high inputs to grow more yield, you know per per hectare. But I think the third revolution which is starting to happen now is a shift with biology, you know, understanding how these biological systems work and how soils function and then harnessing the biological ecology process to build good farming systems. So I think we're seeing it on the ground, with farmers. We're seeing it with actually also starter companies too, working in biologicals and you know, fertilizers, stimulants, seed coating, so that's, I think all the activity is. And regenerative agriculture is building on that, building on that science.

Speaker 2: 51:35

So that's the first thing we always say and the second around, absolutely right around labor and the role of mechanization and technology. The other big challenge that all farmers and farming systems have is attracting labor. You know, finding people to work on the land it's going to be harder and harder, and that's not necessarily a bad thing because people don't want to do menial, backbreaking sort of peasant type labor in the fields anymore if they can avoid it. And so I think we see increasing need for clever use of machines and technology, robotics, you know, robotic weeders we're expending. We may experiment with a self driving electric tractor in our orchards in California to mow the cover crops so we don't need to spray herbicides, you know. So they can be very consistent. We think with, again, biological regenerative systems where you're again taking out the chemicals and using machines, technology, robots for mechanical and other control of pests and disease and weeds.

Speaker 1: 52:28

And do you then see investors click on that? Or it depends, obviously, but the you is that a an easily overcomable, let's say, narrative to, to get people on board that this is actually modern agriculture and not tradition, or convey, or like not going back to you.

Speaker 2: 52:45

Yeah, I think if you get, if you get investors out on farm, they see that these are scaled up commercial operations, farmers with you know, like healthy balance sheets with millions of dollars and assets or euros and assets, and employing you know, you know people and in business and growing. I think they see that these are real, proper businesses. So I do think the evidence is there, like this isn't just sort of one hectare hobby plots, you know, in someone's backyard this, these are proper commercial farms, applying these ideas, you know, on a big scale and do you do that a lot like getting investors out there?

Speaker 2: 53:23

We try, we always invite and always welcome investors to come. It can be hard, you know they're busy, they have limited budget, so but I find it makes a huge difference if you can get people out on farm for a day or two. Everything has to click. You know after that much more quickly.

Speaker 1: 53:37

Yeah, the conversion, I think, goes up significantly. I heard somebody who was it probably an interview that just went out actually, as we're talking on our first three partners like almost every investor that visited. Of course the sample size might be small, but almost everybody that visited ended up investing and just yeah, the selection criteria is, of course, also there. You only go if you're pretty sure you're gonna do something, but still it's very strong because most people, let's not forget, are in New York, london, amsterdam, delhi, shanghai, wherever in financial centers, let's say, the exposure to farmland is very limited and, yeah, learning through white papers is great, but getting out there is a whole different experience and there are examples everywhere you can visit, like it's not impossible to find something a couple of hours travel from where you are to see at least something relatively scalable, with with a lot of interesting practices applied. So I think that is a perfect way to to wrap this interview up, or this conversation up.

Speaker 1: 54:39

I want to thank you so much for rewriting the white paper. We completely redoing that and publishing. I know I've been annoying you for a long time. When is the new one coming? When is anyone coming? For sure many others have done the same, so thank you for that. This is definitely a huge asset. I can't remember how many times I shared the previous one, so now I have to update my links and we'll make sure to spread this as wide and far as possible. So thank you so much for joining us here, for sharing and for all the hard work on the land, investing and, of course, writing this white paper.

Speaker 2: 55:12

Yeah, thanks, kanna, and thanks for publicizing the last paper, and I think it probably was partly you're nagging over the last few three years was prompted us to write the next one, so let us know when you think the third chapter is required.

Speaker 1: 55:25

I won't do it for a couple of years. Don't worry, thank you so much for listening all the way to the end. For the show notes and links we discussed in this episode, check out our website investing in regenerategraculturecom forward slash posts. If you like this episode, why not share it with a friend or give us a rating on Apple podcasts? That really helps. Thanks again and see you next time.