Equity Research

Decarbonizing the Farm Empowered by Smart-Tech Equipment and Carbon Markets

October 2022 / 7 minute read
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While the farm sector is a major source of greenhouse gas emissions, it can also be a big part of the solution to reduce them. By embracing progressive agronomic practices around sustainability, farmers have the ability to store greenhouse gases (GHG) such as carbon dioxide in the soil.

Not only does that increase the organic matter and productivity of the soil, farmers can sell that stored carbon in the form of carbon credits to other industries looking to reduce their net emissions, says William Blair analyst Larry De Maria, co-group head of equity research’s global industrial infrastructure team.

“The linchpin in the process will be equipment manufacturers enabling farmers to collect data directly from the field and measure the carbon intensity of their soils,” De Maria adds. “Investment capital, leading companies, and smart business practices are pushing the agricultural industry toward the adoption of sustainability to better align with consumer values. All of this is being done in parallel with farming solutions focused on the return on investment.”

Larry De Maria
Larry De Maria, CFA, Equity Research analyst and co-group head, Global Industrial Infrastructure

On the Farm

The U.S. government reports that agriculture accounts for about 10% of U.S. emissions, which are directly released into the atmosphere as a result of farming activities. But a broader analysis by the Food and Agricultural Organization (FAO) of the supply chain—from the farm to the table, including food processing, packaging, transport, consumption, and waste disposal—suggests that number could be much larger, more like 30%, De Maria says.

Most ag-related emissions come from soil management, the digestive track of cattle and other ruminants, manure management, and general energy use, he says.

Carbon dioxide. During the growing cycle of a plant, CO2 gas is generated and emitted when farm equipment moves across crop fields for tilling, pesticide and fertilizer applications, and harvesting. The more a machine passes through the field, the more carbon that is emitted.

Methane. As cattle and other ruminants digest grass and other vegetation, they release methane gasses. Manure is another source of methane but when composted produces very few emissions.

Nitrous oxide. Synthetic fertilizers and legumes are the largest source of nitrous oxide on the farm and typically released into the atmosphere when the soil is not covered with plants.

Agriculture also has the unique ability to be a carbon “sink,” absorbing more carbon from the atmosphere than it releases, thus reducing its GHG emissions, De Maria says. As plants grow, they take carbon dioxide from the atmosphere and turn it into sugars through photosynthesis.

The carbon that plants absorb during photosynthesis becomes part of the soil when they decompose and turn into soil organic carbon. Sustainable farming methods like planting cover crops, limiting soil disturbance by low-till/no-till practices, or applying manure to fields are among the solutions farmers can adopt to store more carbon.

Bottom line, equipment companies are well positioned for this changing environment.

Larry De Maria

Equipment Manufacturers Positioned to Thrive

De Maria says equipment manufacturers such as Deere, AGCO, and CNH have been providing opportunities for farmers to reduce their carbon footprint over the years with their high-tech, cloud-connected tractors and planters to sow fewer seeds, apply less herbicide, better manage fertilizer applications, and use less diesel. Going forward, companies will offer more smart-tech solutions to help progressive farmers track the carbon intensity of their soils. They can sequester up to one metric ton of CO2 per acre, per year, which they can ultimately monetize via carbon credits. 

In many ways, Deere has been a clear leader, he adds, but other companies such as AGCO and CNH have brought sustainable agtech to the market as well. The advantage for Deere is that its cloud-based farm management system links data collected in the field to its operations center that farmers can use to monitor, organize, and analyze. That data will help customers track the carbon intensity of their fields. Of its farmer customers engaged with its operations center, Deere aims to have 75% of its “engaged acres” to be “sustainably engaged” by 2030.

“Bottom line, equipment companies are well positioned for this changing environment,” De Maria says. “They are the ones with the smart technologies, they are the ones in the field, they are the ones with all the data. And as carbon markets develop, the industry will need to go to them to verify how much soil organic matter is the ground. They are in a good strategic position.”

Carbon Trading Markets

De Maria says carbon markets have been around for decades but are expanding and becoming more sophisticated as more companies like Microsoft and Amazon pledge to reach “net zero” carbon emissions—CO2 produced balances the amount removed from the atmosphere—within the next decade or so. While many companies can take steps to lower their emissions, they will not be able to go to net zero without buying carbon credits in the marketplace. Agriculture will be a prime provider of those credits.

There are two types of carbon markets: compliance and voluntary.

Compliance markets are typically organized and regulated by national, regional, or international carbon reduction regimes that place a mandatory cap on the amount of greenhouse gas emissions certain industries can emit, he says. Some offer a “cap-and-trade” feature, which allows emitters and financial intermediaries to buy and sell carbon allowances for profit or to meet regulatory requirements.

Voluntary markets are established by private companies that develop and operate a marketplace to facilitate the buying and selling of carbon credits on a voluntary basis. Each market operator sets specific verification standards, credit registries, participation requirements, and project criteria for its carbon market.

“The voluntary market is where agriculture can drive the most change, and where growers have the best opportunity to derive additional revenue,” says De Maria. “It’s also where companies will turn to help meet their net emission pledges.

“As such, McKinsey estimates the potential annual supply of carbon credits could increase to 8.0 to 12.0 gigatons of carbon dioxide by 2030, creating a market sized within the range of $5 billion to $30 billion on the low end and $50 billion at the high end.”

That potential has resulted in the formation of several independent markets over the past few years, including Indigo Ag, Nori Marketplace, Truterra, he adds.

Indigo Ag, a Boston, Massachusetts-based agtech company that works with plant microbes, last year formed a partnership with Corteva to expand its carbon credit program in 2022. Since demand for ag-based credits has accelerated over the past year, Indigo offers growers a price floor of $20 per carbon credit.

Nori Marketplace, based in Seattle, Washington, manages a fully functioning voluntary carbon market. Each carbon credit sold by Nori represents one metric ton of carbon removed from the atmosphere that will be stored for a minimum of 10 years. The first batch of credits were sold in 2019.

Truterra, the sustainability business of farm cooperative Land O’Lakes, launched its carbon program in 2021 to help farmers generate and sell carbon credits to private sector buyers. For the 2022 carbon program, Truterra is offering farmers $20 per ton for the additional carbon they have removed from the atmosphere over the past three years through the adoption of environmentally friendly growing practices.

“As the world of ag transforms to adopt agtech, GHG reduction initiatives, and push for sustainability—data collection, connectivity, and transparency will become an important aspect to everyone involved in the food supply chain,” De Maria says. “Original equipment manufacturers are introducing more automation, data linkage, and variable rate equipment with demonstrable returns will not only help farmers increase efficiencies and improve ROIs but will also provide a better, verifiable environmental outcome.”

To receive Larry De Maria’s Decarbonizing the Farm research report, contact your William Blair representative. Visit williamblair.com/ResearchCoverage for disclosure information.