CARBON farming is a huge topic right now. From Human-Induced (Vegetation) Regeneration (HIR), to Savanna Fire Management, Avoided Deforestation and Soil Carbon Sequestration, there is rarely a day goes by without mention of carbon farming in the media.
The two-fold impact to the agricultural sector
Firstly, carbon farming represents the potential for an additional income stream that is not contingent on seasonal conditions or commodity prices – much like wind turbines. This is clearly an attractive proposition in an industry with often highly variable returns from one year to the next.
Secondly, carbon farming provides the opportunity for the sector to achieve ‘net zero’ emissions. With industry bodies such as Meat & Livestock Australia and the National Farmers Federation setting carbon neutrality targets (for 2030 and 2050, respectively) there will, inevitably, be increasing pressure on individual farm operations to achieve ‘net zero’. They can achieve this by reducing their existing emissions (electric tractors, methane reduction, renewable energy sources, etc.) and offsetting unavoidable emissions.
The positive influence this has on farmland values
At this stage, there have been very few transactions of properties with carbon projects in place. Those transactions that have occurred have been difficult to analyse due to limited transparency on the terms of the carbon project.
However, the additional income stream is likely to provide significant appeal to potential purchasers, fundamentally altering the demand / supply equation and putting upward pressure on values. In some instances, there may be direct productivity enhancements as a result of the carbon project, for example soil carbon sequestration. Further, the additional income allows for an indirect productivity increase through reinvestment in the farm for example new fencing, watering points, pastures, etc. There’s clearly some upside.
But, what’s the downside?
Unfortunately, there are often negative trade-offs as a result of these carbon projects. HIR and Avoided Deforestation (which have been the most popular project types to date) are particularly inherent of reducing the productive potential of the property, even where the project only impacts a portion of the farm.
These projects also require long-term (25-100 year) commitments from the landowner, with ongoing obligations in relation to vegetation management, stocking capacity and bushfire prevention. Extreme weather events, including bushfire, can effectively place a pause on the income stream until regrowth has occurred to a level equivalent to the vegetation coverage pre-bushfire. This is likely to take numerous years to be achieved.
Beyond the life of the project, State laws may then restrict any clearing of the land, with the landholder therefore unable to utilise the project land productively or re-establish the income stream with another carbon project.
Carbon farming examples and what the future holds
Focusing on those projects which have proved most popular to date (HIR and Avoided Deforestation), the following case studies demonstrate the impact on farmland values to date.
As can be seen here, the net result on value will differ depending on the specifics of each project, including factors such as the breadth of the project area, impact on productivity and level of income received. In some cases, the income received may not be sufficient to offset the reduction in carrying capacity. However, this is less likely to be the case with the expected increase in carbon price as has already been experienced over the last 12 months. In other cases the overall value may increase, however the underlying land value decreases (as a result of reduced agricultural productivity), which can impact on borrowing capacity.
While the gains from these case studies vary, carbon farming (in particular newer methods such as soil carbon sequestration) is still very much in its infancy. Only time will tell whether the increasing consumer demand for more sustainable projects and adapting government regulations in this area, will increase the appeal of carbon farming projects, driving demand for suitable properties, and therefore land values, to higher levels.
Further reading: Smart operators seeking out carbon potential
* Author Simon Altschwager is national director for agribusiness with CBRE