Better soil, higher-quality crops, and healthier people are all frequently listed as benefits of regenerative agriculture, but the reality is that without more financing in the space, none of these goals will become realities.
“You can’t have mission without margin,” explains Brandon Welch, cofounder of regenerative finance firm Mad Capital. “Financial aptitude must be up there with the ability to ecologically perform. This shouldn’t be an either/or.”
Farmers’ struggles with financing the transition to regen ag are well documented. Organic and regenerative farmers use different practices and equipment and sell into different markets than conventional operators. Because of that, farm credit institutions and community banks are often unfamiliar with these specialty practices, and the process of getting them financed is rife with friction.
In response to this issue, a number of alternative financing options have popped up over the years, Mad Capital being one of the best known firms focused on the US.
The company offers four different types of loans to farmers and ranchers: operating capital, real estate loans, infrastructure loans, and equipment loans.
Welch says the firm currently has about $100 million in assets and lends to around 200,000 acres of land across 18 states in the US.
He recently sat down with AgFunderNews to discuss what farmers really need in terms of financing.
AgFunderNews (AFN): Which of Mad Capital’s four types of loans do growers tend to seek out most?
Brandon Welch (BW): A working capital loan/operating loan. That particular segment of the financial market is lacking more than others. The big disconnect is often because working capital financing is typically tied to shorter-term assets, and it’s not inherently designed to take long-duration risk because the underlying collateral is always transforming the nature of its value. So you’re moving from valuing seeds into a growing crop into harvested inventory, or potentially a crop insurance claim into cash, then back into seeds.
It takes a long-term relationship and partnership in order to really work with a producer as they navigate a transition, because an organic transition takes a minimum of three years to navigate. So that’s where we see the largest gap because the traditional lending institutions don’t have the experience in working with these types of farmers. In the US, only 1-1.5% of all land is certified organic. [If you are a traditional lending institution], why deal with that problem when you’ve got 99 other potential customers lined up for conventional operating capital?
AFN: Why is the number of farmers in organic and regen-organic still so low?
BW: It’s a myriad of factors that’s holding farmers back from transitioning, with the primary one being the cultural friction. I think there’s so much inertia around the traditional way of doing business, and how you grow corn and soybeans, the equipment you use, etc. All your neighbors are doing it the same exact way. When a farmer wants to start thinking about even something simple, like cover cropping, never mind transitioning to organic, they’re stepping outside the bounds, outside the box of what’s societally normal within their group.
That, by definition, takes someone who is abnormal, someone who is a risk taker, someone who is willing to be seen differently and live in that confidently.
It’s going to take time for enough farmers to successfully navigate a transition, for there to be a critical mass, to start seeing a true transformation of the food system.
However, I think as more economics become more well known, and we move from the anecdotal stories of into true data showing [positive results], we can then start seeing that in terms of pricing. So you’re seeing, maybe insurance costs go down for lower risk farmers who adopting regenerative practices. When it starts hitting their bottom line, we should start to see a larger shift in the food system overall.
AFN: Besides access to finance, what are some other major barriers for farmers?
BW: Finding new markets is challenging for many farmers, because there’s no premium for regenerative conventional crops. Consumers want to buy organic. You know, they don’t care that the soil sequestered carbon. They care that the apple they’re giving their children isn’t covered in some sort of a pesticide.
Another barrier is access to technical assistance. I think technology as well. As we see an increase in autonomy— like basic robotics to remove weed pressure versus having to use synthetics—that’s where we could start to see regenerative conventional at least scale, as well as organic.
I don’t think there’s any silver bullets in this movement at all. I haven’t come across any.
AFN: What about access to land for farmers?
BW: There are other groups out there, like Clear Frontier or Iroquois Valley Farms, or maybe SLM Partners, who are able to purchase farmland and then lease it to a farmer on more flexible terms during those transition years. Functionally, from a cash flow perspective, this gets to a a similar cash surplus or deficit on the operating farm as our loans do. They just come at it from a different angle by being the owner of the land.
AFN: Talk about what’s working right now in regenerative finance, and what excites you
BW: Over the last few years, we’ve seen a shift in the inbound conversations we’re having, and that that shift is moving from missionary farmers who are making the transition simply because they think it’s the right thing to do, to having many more conversations with commercially oriented operators who operate with the same mindset of bank capital: that you can’t have mission without margin. Financial aptitude must be up there with their ability to ecologically perform. This shouldn’t be an either/or.
What we’re seeing is that when a farmer transitions to organic and uses regenerative practices, they’re more profitable than their conventional neighbors.
I’m talking to farmers with 3,000 to 5,000 acres, these are serious businesses and they are starting to transition because it makes better business sense and they enjoy the business of growing food for people in a way that’s less harmful for them and their workers.
I’ve also just been encouraged by the sophistication level of borrowers increasing over time, and hope to see more of that. Over time, we’re going to be more confident in the predictability of being able to underwrite those types of transactions.
