The investment case for ecological farming

Author: Paul McMahon

Farmland investing today

Farmland has emerged as a new asset class for investors over the past decade because of higher food prices. Historical returns have been good. However, commodity prices have dropped and farmland values are plateauing in many regions. In addition, most investment has gone into high-input, industrialised farming systems that are exposed to hidden risks. In future, investors will need to be smarter and more environmentally-aware to capture the opportunities.

The risks of industrial  agriculture

The profitability and sustainability of industrial agriculture are exposed to five major risks, which are set to intensify in coming decades:

  1. Exposure to high and volatile input costs
  2. Degrading natural assets such as soils and water reserves
  3. Vulnerability to a changing climate, especially extreme weather events
  4. Negative environmental externalities that will be increasingly taxed or regulated
  5. Shifting consumer trends, as people demand clean, green, healthy and tasty food
  6. Ecological farming: an attractive alternative

There is an alternative way to manage land that can minimise these risks, while increasing profitability. Ecological farming seeks to build soil health, minimise external inputs, recycle nutrients and energy, embrace diversity of crops and animals, and produce high value food and commodities. It is not necessarily organic (although it often can be), it can be practised on a commercial scale, and it is firmly science-based.

We have identified a number of proven systems that have investment merit. They include:

  • Holistic planned grazing for cattle and sheep
  • No-till cropping with diverse cover crops
  • Agroforestry systems
  • Low input pasture-based dairy
  • Certified organic farming in certain countries

Seven reasons to go ecological

There are a number of reasons why these types of systems can deliver superior risk-adjusted returns:

  1. Comparable or better yields in most cases
  2. Lower operating costs because of less reliance on external inputs
  3. Enhanced natural capital, with the opportunity to increase asset values by regenerating
    degraded land
  4. Climatic resilience because healthy soils cope better with droughts and floods
  5. Positive environmental externalities and the chance to be paid for them, for example through carbon credits
  6. The ability to sell to higher value markets such as organic or grass-fed
  7. Higher profitability with less volatility