Agriculture's Benefits: The Ecosystem Services of Farmland
Quality agricultural land is one of the crown jewels of America. The US has some of the world’s most fertile soils and is one of the few net exporters of food. In fact, the agricultural industry at large contributed $1.109 trillion to the U.S. gross domestic product (GDP) in 2019.
The agricultural land that feeds our country, however, is worth more than just economic gains. It provides social benefits and, if done sustainably, ecological benefits as well.
One method that has been used to quantify the ecological benefits of agricultural land is to evaluate and set a price for ecosystem services that the land provides. An ecosystem service is the social and economic value of the broader benefits that an ecosystem contributes to society. U.S. agricultural land comprises roughly 45% of all land in the U.S. and these lands often provide us with much more than just food.
US farmland has the potential to store water, increase water quality, provide pollinator and wildlife habitat, sequester carbon and much more. While much of the agricultural land in the U.S. is managed using harmful chemical inputs and heavy tillage that can damage these services, there are options for managing land to improve its ecosystem services while also improving productivity. These management practices, many of which fit within the broader description of regenerative agriculture, look to work with nature rather than against it to provide both food and ecological value.
Brief History of Ecosystem Service Valuations
The term ecosystem services is defined as the “outputs, conditions, or processes of natural systems that directly or indirectly benefit humans or enhance social welfare”. Regenerative agriculture, where agricultural systems align closer with natural systems, is poised to provide a suite of ecosystem services.
But what exactly does that mean, and where did the term come from? Let’s take a look.
Resource economists have long struggled to quantify the economic value of ‘non-market goods’ - or things that don’t have a market price for the good. These include personal attributes such as happiness, well-being, and health, as well as environmental attributes, such as beautiful views or green spaces. The concept of ecosystem services arose in the 1970s as a way to capture the benefits of biodiversity conservation in a way that would garner public interest and protection. Today, it is an entire field of academic literature and one of the main reasons we have seen the development of ecosystem service markets, such as carbon, wetland, and alternative water markets.
So how are these non-market goods valued? There are a few major tools that economists use when thinking about ecosystem service values. The first is a hedonic analysis. This process is widely used to find the implicit price of something. The method uses market prices regressed on the non-market attributes of the good to determine a relative price of the attribute; it is often used with real-estate transactions to estimate the value of having a park, good school, additional number of bedrooms, etc. in a particular location.
The second widely used method is known as revealed preferences, which estimates the implied willingness to pay for environmental benefits. For example, to calculate the value of fish in a certain river, economists first calculate the travel costs associated with fishermen and tourists who pay for the existence of those fish, and then estimate the fish’s ecosystem service value based on those calculations.
Both of these common methods are used to estimate the price of a particular ecosystem service, like soil carbon or water quality. But it’s not a perfect strategy. Isolating ecological attributes is often controversial, as ecological systems are composed of intrinsically interconnected pieces that are difficult to separate, let alone quantify.
Today, the field of ecosystem services research is broad and filled with a variety of opinions and strategies. Ultimately, the goal is to ensure that natural resources are sustained into the future by ensuring that humans are properly valuing the benefits that they provide.
How Regenerative Agriculture Adds Value
So what does this mean for agriculture? Agricultural land is not only valued based on its agricultural production value, but also its potential alternative revenue streams. As ecosystem service markets begin to grow larger and stabilize, they provide potential opportunities for alternative revenue sources, particularly for farms that are working within regenerative principles to maintain soil health and water quality.
Regenerative agriculture takes a focus on the soil and brings the value of this incredible resource to the forefront. Soils can be thought of as an ecosystem, and a valuable natural resource, all on their own. Just like any natural resource, such as timber or water, they can be over harvested and depleted. Topsoil, the nutrient rich decomposed mineral and organic material at the top of the soil column, is where we grow 95% of our food. This fragile ecosystem is made up of thousands of bacteria, fungi, and compounds that allow for nutrient rich food. When properly managed, this ecosystem can regulate water flows, sustain plant and animal life, filter and buffer potential pollutants, cycle nutrients, and more.
The functions of healthy soils have long been known, but in part due to the regenerative agricultural movement, they have seen a resurgence in popularity. Given the recency of this arrival to the zeitgeist, there is little research on the economic value of healthy soils. This is changing quickly, however, due to the agriculture industry’s increasing emphasis on carbon markets and the role that healthy soils plays in carbon sequestration.
Sustaining agriculture into the future with increasing food demands and a changing climate requires that producers maintain their soil health and ecosystem. FarmTogether invests into these producers, ensuring that land is profitable and sustainable.
How FarmTogether is Adding Value to Our Ecosystems
FarmTogether provides the opportunity for investors to be part of the sustainable agriculture movement by providing capital infusion and support to farmers who are focusing on soil health. These farmers are providing ecosystem services by way of pollinator and wildlife habitat, soil organic carbon, improved water quality, and more, all the while providing stable cash returns on the investment.
Although agriculture has been portrayed at times as an extractive industry, farmland can indeed contribute to the regeneration of our natural ecosystems if managed properly. As land is restored to a state that works with nature, it not only provides external benefits, but also becomes more valuable. Well-managed farmland that provides valuable ecosystem services is more likely to be a resilient and productive investment asset in the long-run, and will be better equipped to buffer against drought and other environmental stressors.
Agriculture is an incredibly unique industry. It has the potential to provide a necessary product by way of food and ecosystem services to improve social and economic well-being.
Interested in learning more about FarmTogether's commitment to funding sustainable and prosperous farming? Check out our ESG page.
Disclaimer: FarmTogether is not a registered broker-dealer, investment adviser or investment manager. FarmTogether does not provide tax, legal or investment advice. This material has been prepared for informational and educational purposes only. You should consult your own tax, legal and investment advisors before engaging in any transaction.