Any industrialist, when having to decide between a production process that depreciates the company’s technological assets and one that preserves them, would choose the second. The main asset of agriculture, the land, has been gradually deteriorating despite the fact that an alternative “technology” is available, one that can guarantee superior results and better land quality. This advanced technology is regenerative agriculture.
Conventional agriculture revolves around product maximization and economies of scale. Land is treated like a simple substrate which guarantees abundant yields with the help of external input (primarily synthetic fertilizers). For entrepreneurs who adopt this approach, their assets are machinery.
But the drawbacks are myriad. To start with, fertilizer production requires a tremendous amount of energy, mainly from fossil sources, which equals pollutants. Second, Europe imports 95% of its fertilizers, two-thirds of which comes from geopolitically risky countries, such as Russia and Belorussia. What’s more, this type of agriculture appreciably degenerates soil quality. According to the Report on the Health of the Soil published by the Italian Institute for Environmental Protection and Research (known as ISPRA), 80% of farmland is subject to erosion, 68% of pastureland has lost more than 60% of the total organic carbon that was originally present in the soil. (It’s been released into the atmosphere, accelerating climate change.) There’s 23% more nitrogen too.
The vast majority of these effects could be avoided by adopting regenerative agriculture, an approach that emphasizes sustainable farming practices that minimize soil disturbance and foster biodiversity. In addition to cutting back on the use of farming machinery (to include no-till farming), regenerative agriculture encourages a series of practices such as introducing shade-producing plants in the context of crop rotation. Doing so would create an environment where biodiversity can flourish. These plants also absorb carbon dioxide, which is then stored as carbon in the soil when they are purposely destroyed in the fields before sowing the next cash crop.
Regenerative agriculture not only brings farming operations into line with ethical and ecological aims; it also makes sense from an economic standpoint. This according to an analysis done by the Invernizzi AGRI Lab at SDA Bocconi on data generated by decades-long soil testing in Italy’s Po Valley. Yields from fields where regenerative agriculture is applied raise to levels on par with conventional agriculture after just two years, and at much lower costs. The reason is the need for far less synthetic input (from fertilizers to diesel fuel for tractors), which can be reduced by as much as 70%. But this cannot – and must not – be the only assessment parameter.
If the main asset of a farm is the land, this must be the basis for traditional efficiency evaluations (not machinery). What’s more, production can’t be considered the sole output metric. We also have to factor in what we call ecosystem services, such as carbon storage, the reduction in fertilizer use, and biodiversity.
If we apply a flexible, widely used valuation tool called Overall Equipment Effectiveness (OEE), we find that the value of land farmed with regenerative agriculture is around six times greater than farmlands cultivated with conventional methods.
So why isn’t regenerative agriculture more popular? Beyond the natural resistance to change, what’s missing is an appropriate incentive structure. The EU has listed regenerative agriculture as one of the natural solutions that can be leveraged to climate combat change, but places all the attention on a single parameter – carbon storage – which isn’t enough to enact change. Today, the transition to regenerative would translate into an incentive of around €10 per hectare, while organic farming yields €300.
However, impetus could come from the credit market. With loans to farms, 70% of collateral consists of the value of the land, and banks are increasingly subject to ESG regulations. The regenerative approach is ESG compliant and guarantees an appreciation of the land in question that can be as much as 6%, according to our estimates. In other words, regenerative agriculture could secure bigger – and cheaper – loans for farms.
Originally published in Fortune Italia
