Economic modeling is an essential process for planning financially viable (and therefore sustainable) food and farm businesses.
Financial analysis and business planning should be made more accessible to farmers through agricultural extension services or other providers.
Pre-purchase agreements from retailers can support the long-term investment required for tree crops in the Hudson Valley and greater Northeast.
The payment of ecosystem services could provide an additional revenue stream for farmers regenerating the health of their land.
TALKING WITH with Harry Greene
and Jeremy Kaufman of Propagate Ventures
Contributor: Mark Phillips
Propagate Ventures is a start-up focused on regenerative agriculture investments and funding, with a specific focus on agroforestry in the temperate climates of the United States. One of their first projects is being developed in Columbia County, New York. Co-founders Harry Greene and Jeremy Kaufman talk here about the importance of economic modeling for regenerative agriculture and the challenge and opportunity of collecting data on margins and pricing across the supply chain.
Harry and Jeremy both recognize that the core of their work so far is to bring sound economic modeling into the business of regenerative agriculture, which can entail enterprise and farm planning decisions that might take five to ten years to execute (or even longer for some forms of agroforestry). In such a context, precise economic modeling of the actual land-use changes required for regenerative agriculture is foundational to developing farm models that are financially viable and therefore sustainable over the long term.
The foundation of what we do is identifying the financial case for changing the way in which agriculture is done. That could be with something as simple as spraying compost tea to something more complex like planting a thirty-acre orchard. Business decisions require feedback to be made effectively, and economic modeling allows for those signals to be captured in a quantitative format.
I think there’s two sides to it. How is anyone going to start a farm unless they know what the true cost is to start? How is anyone going to change a farm business model unless they know the costs of changing? These questions can be answered by going deep into the costs of a specific activity on-farm, looking at what it takes to do a specific task, and how that flows into the total project costs. It is important to be able to accurately understand what that looks like to help enable people to get into planting trees and exploring silvopasture. We focus on agriculture, but the concept applies to all regenerative businesses.
All of this is modeled in a very detailed way by large producers of commodity crops. If you ask a company how much they will gain from spraying X on corn, they will know that. Any farm that’s run like a factory knows its costs, and we have to differentiate between something that’s run with the efficiency of a factory and factory farming. You can run a tight ship on an organic spinach farm and run it like a factory, but not have the environmental downsides of industrial spinach farming.
This is all equally important in the context of farms that are operating on a smaller scale, with smaller margins. For example, economic modeling allows you to answer the question of whether or not to apply for a grant or a bank loan. So, by understanding that you may only see a 5 percent return at the end of the day, then you might consider some funding options to cover your capital costs to be able to increase the return potential. If you don’t know whether or not you can actually pay back a loan, based on your cash flow, then five years from now you might be under water financially.
With all of this in mind, economic modeling can help inform what business decisions to make, or not to make. As an example, if the process reveals a firm will need 700 customers per month to make a business profitable, then we can use this data to better understand where and when to allocate our scarce resources, and sort out an appropriate growth trajectory.
Robust economic modeling is also imperative when looking at new crops for a region, when local data isn’t yet available. We’re often drawn toward apples, because they’re a traditional food in the Northeast and the Hudson Valley, but there are various other opportunities across temperate climates that we’ve identified through economic modeling. A great crop for the region could very well be blackcurrants. There’s a white space there. Deer don’t eat them, they’re less susceptible to disease, and they’re hyper nutrient dense...vitamin C, anthocyanins, etc. Great value proposition, but the challenge arises in branding and market penetration, given that they’re a lesser-known substitute for other fruit. The point is that when we model something exhaustively, from beginning to end, and ask the hard questions, we also de-risk potential growth markets.
When asked how economic modeling can be brought to farmers throughout the region, the need was identified for extension services and agents trained in accounting and financial modeling. People who are already working directly with producers on the ground need to have the capacity for business planning and effective financial analysis.
Using apples as an example, Harry and Jeremy observe that one challenge for clear economic modeling is understanding the price across a supply chain:
There’s the market side, which is the price of the product that consumers purchase. And then there’s the true cost analysis for the producer, trying to understand what the costs of doing business actually are. This side is a little easier right now to model compared to the price side. Right now we don’t have a good understanding of what the true value of an organic apple grown in the Hudson Valley is in the New York City marketplace compared to apples grown in the Pacific Northwest. We can really only gather information based on word of mouth. There isn’t a good way to get data on apple pricing throughout the food system. The people who interact directly with the customer have the best understanding of where the market is and how pricing evolves with demand.
On the question of pricing, there is also analytical work to be done in mapping the change over time of how prices have affected growers. Do we have data about how the price of apples has changed over time in the Hudson Valley? Customer data for how sales have changed for growers? Real information that we can present to legislators, investors, etc. around the state of apples in New York would be very useful.
Mapping the flow of money throughout the food system would elucidate a lot. Map the flow of a dollar through the supply chain: what’s being produced, and who takes home the income? Looking at the retailer, distributor, and the farmer, who gets the margins on an apple? Then, what do farmers’ costs look like between paying for inputs and paying for labour?
Once we understand the flow of money, we can compare commodity apples or dairy with small-scale direct-to-consumer models: how many cents on the dollar actually get to the farmer in each of those scenarios? What would farmers do differently with higher margins? Numbers and financial data are unique in their ability to tell the truth about what’s actually happening in our food system.
Conversion from conventional apple orchards to organic management was cited as a complex financial and management challenge for farmers, which could be addressed through better financial planning and purchase agreements from larger retailers:
The cost of conversion for apple orchards from conventional to organic is not well understood. We know it’s extremely difficult and you can expect a loss in the first five to ten years. It doesn’t make sense unless there are guaranteed purchase agreements or additional funding, where the growers know they will get paid enough in their conversion to keep afloat.
The long-term time horizon is the tricky part with permanent crops. Commitments from purchasers usually don’t go beyond one year. Imagine a retailer providing a five-year loan for organic apple conversion in the northeast (which is something they could do to secure their supply chain). That could cover the cost of conversion, and at the end of the day they would have guaranteed supply for a certain amount of time for their consumers. Cost sharing/investing within the supply chain allows buyers to hit their expected margins with a locked-in purchase price as compared to buying and selling in commodity market. This can provide more stability to those farmers moving through a transition.
On the question of scaling regenerative agriculture, Harry and Jeremy envision consumer awareness, ecosystem services, and the “Tesla Model” as potential pathways for growing the movement:
At at consumer level, the correlation between ecologically-sound food production and healthy food is pretty significant: the more people can feel that on a very visceral level, the more likely they are to pull regenerative agriculture up with their purchasing decisions.
Another route for scale is perhaps a bit more complex: ecosystem services are a public good, meaning that individuals usually won’t pay for them. A monopsony is a single buyer in the way that a monopoly is a single supplier, and in the case of paying for ecosystem services, eliminating competition is a good thing. Otherwise we undervalue those services. This monopsony, whether it’s a municipality or an insurance company, would be well suited to pay farmers for the ecosystem services they could provide. This would create secondary income streams for regenerative agriculture. Example: had the soil around Houston been more permeable, due to really good grazing management, the flooding from Hurricane Harvey might not have caused so much damage.
The Tesla model is another route. Letting the high net-worth buyers bear the brunt of the scaling costs in the short term to make it more accessible in the long term.
Segueing a bit, when it comes to making investments in the photosynthesis-based economy, let’s be aware that the returns are going to look and act much different than what we are used to from something like a tech investment or mining.
Harry and Jeremy also observe that the culture of philanthropy and finance are divergent and could benefit from shifting perspectives on either side of the spectrum:
Let’s say you’re only making a 5% return — most venture investors will pick apart the opportunities to push returns at an increased speed, whereas with a philanthropy lens we care about measured impact. We find that these perspectives can potentially come into conflict with each other. We have to merge the culture of giving and investing so that they aren't siloed. We can find ways to integrate the value of long-term impact with financial returns on investment, and agriculture is a clear opportunity to do so.
Moving forward, network development for stakeholders across the regenerative food system in the Hudson Valley is recognized as a valuable opportunity for enhancing collaboration. A regenerative food system is about building connections across the value chain—connecting real people who represent the gold standard of production with those at the other end of the supply chain who will buy the produce.
It would be great to see a network of the best growers of a variety of crops that are focused on regenerative ag. Whether it’s someone trying to do organic apples or timber silvopasture, being able to support and access folks who are focused on implementing regenerative ag on the ground is important. On the other side of it are buyers that have an active stake in what is going on. For example, Hudson Valley Harvest is an organization that cares deeply and they also operate as a functional business. They’re an example that I would identify as a part of a buyers network interested in supporting the Hudson Valley Food System, who also has an active stake on a contractual basis in the supply chain.