While grain growers stand to gain from emerging ‘ecosystem services’ markets – such as for biodiversity credits and improved land valuation from enhanced ‘natural capital’ – there are also risks, in possibly unexpected ways.

A recent study conducted for GRDC by Aton Consulting concluded that while there will be some commercial opportunities for growers from direct participation in these markets (such as placing land that is not currently in production under protection to generate biodiversity credits), larger impacts are more likely related to financing, land valuations and market access issues, and these may be both positive and negative.

The report’s lead author, Dr Karl Nolles from Aton Consulting, says the essence of the research project was around opportunities and risks for grain growers from the rise of carbon markets and environmental services markets. “Our fundamental finding is that while direct revenue opportunities do exist, they are relatively limited, while the risks are quite large,” Dr Nolles says.

“There is an enormous amount of activity globally around issues of biodiversity preservation and reducing carbon emissions.”

Growing global markets for biodiversity or carbon credits will likely be worth tens of billions of dollars per annum within a decade, he says.

“Australian grain growers, by virtue of grain being grown in large monocultures, will on current technologies have limited direct opportunity to participate as sellers in those markets. They will however be significantly impacted by the risk management activities that are undertaken by their customers.”

The world of finance

One issue identified by the consultants involves the commitment of major financial institutions – both in Australia and globally – towards implementing the global environmental risk reporting framework developed by the Taskforce for Nature Related Financial Disclosure (TNFD) and accounting standards developing via the International Sustainability Standards Board (ISSB).

“Even at the current pilot implementation stage, this is already happening as Australian agricultural lenders add additional questions to the due diligence process around management of on-farm ‘sustainability’ issues, and the amount of ‘natural capital reporting’ that will be required going forward is anticipated to increase,” Dr Nolles says.

“Exactly how the extra data being collected will flow through into loan pricing and other commercial decisions is not yet fully clear. It could, for example, continue the current trend of banks offering preferred interest rates on financing for ‘green’ loans. It could also conversely present as increased interest rates for borrowers with poor performance (or who are unable or unwilling to provide the required data).”

But growers should be aware that this data “will be collected, and it will be used”, he says.

The next step we will see is all the major financiers and agricultural funds collecting this sort of ‘sustainability’ data as part of due diligence processes on loans or on acquisitions of land.

As one example, Dr Nolles says agricultural lenders such as Rabobank and NAB are already collecting additional information about how farms operate in terms of their environmental performance as part of loan application processes.

“How these types of organisations will be using that information once collected is unclear, but the obvious case would be to assist in deciding which clients it wishes to provide loans to and on what terms. In our view, within five years a grain grower who cannot provide detailed environmental performance data will find it increasingly difficult to get finance or to participate in major export markets,” he says.

Less obviously, he says, but with likely larger commercial relevance, are potential impacts on land valuations. “To this point, there is very limited evidence of ‘environmental’ performance (as evidenced in some form of ‘natural capital accounting’) having direct impact on land valuations.

“However, this appears to be more due to the lack of time-series data to identify the correlations, rather than the lack of such correlation existing. Some agricultural investment funds already claim to be able to identify and exploit such correlations, although there are unwilling to provide details. Where public data has been developed (such as the work done by Farming for the Future, a partner on this project), it suggests that when the data is available, correlations between ‘natural capital’ and ‘land valuation’ are identifiable.

“This would imply that as banks (and other agribusinesses) proceed with generally collecting data under their TNFD implementations, ultimately large datasets will become available that will then be incorporated into valuation and lending models. This is highly likely within five years.”

Grain marketing opportunities

One opportunity often raised is the idea of grain growers attracting a price premium for sale of grain with enhanced environmental certifications (such as offering ‘carbon-neutral barley’).

“People talk about this all the time, but when you actually track it back to the source, it’s very hard to find an actual transaction where there is a market premium,” Dr Nolles says.

“We uncovered no evidence of significant opportunity from price premiums. We did, however, uncover considerable evidence of groups looking to use certification processes as a market access issue.”

As a conceptual example, Aton Consulting provided GRDC with a case study of how a hypothetical international malting company (being required to do TNFD reporting itself by its investors) might apply the framework in such a way as to require grain suppliers in Australia to provide a considerable amount of additional data.

“It is unclear how much reporting will be required. But data, and how to collect, process and report it properly, is clearly going to be an important issue over the next few years,” he says.

Case studies

As part of the report, Aton Consulting conducted 30 interviews with major players in the grain supply chain to ascertain what they are doing in this space, and to understand their thoughts about the issues involved.

“The purpose of the case studies was to examine organisations operating up and down the supply chain, including some major grain growers, a funds management business, a grain handler, a major food manufacturer and banks,” Dr Nolles says.

“We tried to learn about the sorts of strategic responses they are making in respect of the rise of carbon and biodiversity markets. And from that, we attempted to map that back to what that would mean for grain growers.”

Relevant frameworks

Finally, he says, there are currently different frameworks, tools and certifications – at state, national and international levels – and it is not clear which should be pursued by individual grain growers.

“Each one takes time to research, and one tool or certification might be better suited to a specific farming enterprise over another. And once a grower has invested in a tool or certification, it may preclude that grower from engaging in a different, more lucrative, certification,” he says.

“This may be due to the time and cost of gaining a different certification, or the reporting tools already invested in are not suitable for the other certification. And it may be growers are simply unaware of more profitable opportunities.

“Grain growers can expect to hear a lot more about TNFD, ecosystem services and ‘natural capital’ in the months and years to come. There are unique opportunities in which growers can benefit. But there are also risks. Staying informed will help.”

More information: Dr Karl Nolles, karel.nolles@aton.com.au