Guaranteed Offtake Could Support Climate Smart Agriculture

August 1, 2019

While long-term Power Purchase Agreements (PPAs) have been promoted for years as a means of creating market certainty for renewable energy sources like wind and solar, similarly long-term obligations to purchase crops from the agriculture sector are being touted as a means of promoting and generating more sustainable production practices, many of which can be used to deal with a changing climate.

Among those promoting guaranteed offtake to generate sustainable production is the Conservation Finance Network (CFN), a diverse association of individuals and organizations from across the private sector, charitable foundations, public agencies, conservation groups and academic institutions. The CFN promotes land and resource conservation by expanding the use of innovative and effective funding and financing strategies.

Simply put, the CFN contends that guaranteeing offtake can drive sustainable agriculture. That could include climate smart agriculture practices. Food companies that are looking to lower supply chain risk and reduce their carbon footprint have new strategies that can increase the adoption of sustainability and low-carbon practices among farmers, ranchers and forestland owners.

Several companies have begun using long-term contracts – purchase agreements guaranteeing offtake over several years – to stabilize costs and allow both growers and buyers to plan further into the future. Because multi-year agreements help to provide assurance for major capital investment, they present an opportunity for advancing more sustainable agricultural practices and conservation benefits, including low-carbon production.

The CFN, which partners in outreach efforts with the Yale Center for Business and the Environment, The Conservation Fund and Island Press, says long-term contracts can be leveraged toward a wide range of environmental benefits. An example cited by the network is Bunge Limited, the largest agricultural exporter in Brazil.

The CFN says Bunge has begun using long-term contracts as a mechanism for reducing deforestation in its soybean supply chain. In 2018 the company announced a partnership with Santander and The Nature Conservancy to provide 10-year loans to farmers willing to commit to producing soybeans “without further deforestation or conversion of native vegetation” in Brazil’s Cerrado region. Building off of Agroideal, a planning tool that maps social and environmental impact data for potential croplands, the loans aim to finance the acquisition of existing cleared areas, avoiding additional deforestation.

Deforestation has been a major issue for the soy industry in Brazil, as growing global demand for the crop threatens the Cerrado and other ecologically valuable areas. Under pressure from regulators and environmental activists to improve sustainability practices, Bunge committed to a zero-deforestation policy in 2015. The company’s latest progress report says it aims for the elimination of deforestation within its supply chain between 2020 and 2025. The loan program, piloted with $50 million in funding, is an attempt to incentivize these outcomes within Bunge’s farmer network. By providing the capital to finance the purchase of already open areas, the company hopes to focus production gains on existing acreage while conserving forestland.

After verifying that land is clear and soybean production wouldn’t generate other major impacts, Bunge’s program does not require sustainable growing practices beyond basic sourcing standards. But the certainty provided by its loans – or any long-term agreement like them – does present the opportunity for growers to make substantial investments on the land, once acquired. By providing access to capital for infrastructure, equipment and land preparation, the long-term contracts could help manage much of the risk associated with steps taken to lower the operation’s carbon footprint.

Other examples offered by the CFN acknowledge that while the opportunity to address climate change and other sustainability issues is compelling, growers are primarily attracted to the increased economic security provided by the long-term supply contracts.

The CFN work exemplifies the kind of policy exploration that is taking place on behalf of agricultural efforts to promote sustainable growth and answer the challenges of a changing climate. It serves as a reminder to those in Washington who set policy to recognize and embrace the multiple climate smart agriculture systems and practices growers can choose from and reject a prescriptive approach to securing agriculture’s future.

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