On-Farm Carbon and Emissions Management: Opportunities and Challenges

Michael Torrance:

Welcome to sustainability leaders. I'm Michael Torrance, chief sustainability officer with BMO financial group. On this show, we will talk with leading sustainability practitioners from the corporate, investor, academic, and NGO communities. To explore how this rapidly evolving field of sustainability is impacting global investment business practices, and our world.

Speaker 3:

The views expressed here are those of the participants and not those of Bank of Montreal it's affiliates or subsidiaries.

Michael Torrance:

Today, we have a special episode from BMO's IN Tune podcast that aired on August 26, 2022. In Tune features equity research analysts from BMO Capital Markets, and explores key emerging themes, trends, and issues, which are important to our institutional clients globally. Today, Camilla Sutton, MD in our BMO equity research group is joined by Joel Jackson, BMO Fertilizers and Chemicals analyst, to discuss his recent report titled "Transitioning to On-Farm Carbon and Emissions Management." As it turns out: Agriculture accounts for 20 to 25 percent of worldwide GHG emissions. Let's listen to what these experts had to say.

Camilla Sutton:

What accounts for 20 to 25% of worldwide GHG emissions? Turns out it's agriculture. And in today's IN Tune podcast, we have the conversation about what the possibilities are to curb these emissions on farm. I'm Camilla Sutton, Head of Product Management in Equity Research. And I am joined by my colleague Joel Jackson, Fertilizers and Chemicals analyst, speaking to his August report titled “Transitioning to On-Farm Carbon and Emissions Management”. Joel, we've got a lot of ground to cover today. So why don't we dive right in? Welcome to the show.You've written some incredible research over the years, but tell us what was the impetus for publishing this report?

Joel Jackson:

Well, like you mentioned earlier, farm and farmland, soils and agriculture are really responsible for maybe a quarter of global emissions,, and this has led to the conversations around all this intensifying, everyone's talking about it, you're seeing a lot in the media and movies. And what we really wanted to do was go and look and say, okay, if farms do focus on doing farming practices, like no-till farming, and cover cropping that will help sequester more carbon in the soil, and emit less – What does this mean for farms for farm profitability? Would this be a benefit? Would this be a burden? And so we hadn't seen anyone else dive deep into the actual impacts for a farmer? Sure, lots of companies are talking about it lots of fertilizer pesticide and seed companies are talking about it. Food companies are talking about it. Lots of companies have pilot programs to figure out how much carbon and other emissions we can save with some of these practices. But no one's talking about it in practical terms, and we really wanted to dive deep into that for investors.

Camilla Sutton:

You can really see how this is growing in importance as well. So why not right up front? What were your core main conclusions from the report?

Joel Jackson:

So you know, while many do hope that some of these farming practices no-till farming and cover cropping could help become a benefit for farmers to monetize sustainability practices and lower all these emissions. Really, what we've kind of learned is, this may actually prove to be a burden, unless government and food industry incentives materially increase and broaden. The transition to no-till and cover cropping creates a meaningful upfront cost for farmers, their sizeable crop production yields lost in the first years, the incremental benefits are very difficult to measure and quantify, and the financial gains and improved soil health takes a long time to materialize. And that's why you see a lot of farmer pushback on it in the last few years.

Camilla Sutton:

So were these findings controversial then? And maybe on top of that, what has the crop input industry provided as feedback for you?

Joel Jackson:

Yeah, I think some of these findings are controversial among the investment community, but not among the companies. So, what we're talking about is this – is the academic value of what people thought the amount of carbon you could sequester in the soil is less than what many thought. Many thought maybe you can sequester 0.6 tonnes of carbon in the soil by doing some of these practices. Turns out, it might be point 0.3, 0.4, 0.5. What we also learned from some of the early data is that it's so variable, how much carbon you can sequester on an acre from year to year, including on the same acre. There are a lot of reasons why — nature, weather, if it's very dry more carbon may get emitted into the into the air, farmer practices, one farmer might do something right, something wrong, that could change. If a farmer decided later on they didn't want this practice anymore, that would emit more carbon into the atmosphere. So, just the amount of variability there. Also, we learned it's very difficult and imprecise to measure carbon with the tools we have today, trying to figure out how much we actually emitted, or not emitted, or sequestered is difficult. And what you're really relying on, is, it's very expensive to actually monitor for how much soil-based carbon is there - you do every five years. It's very expensive to $20 an acre. So you're having to maybe only every fifth year actually monitor for real. So you need to have models modeling how much you probably sequester in years 2, 3, 4, 5 and then maybe in year 6, doing another study and doing a true up later on. So I think also just showing that the yield losses are quite large - what a farmer doesn't like, the farmer doesn't like walking down his or her rows in June and seeing how poor the crop looks, because they're doing new practices. So that's a bit controversial, too. And just overall, what we're seeing is, at least five years payback is needed for this to work for a farm to make money, it could be as high as 10. So, the crop input producers that we cover are all doing this because they want to find out ways to monetize - can they have software tools for farmers to help them operate this? Can they have tools to help farmers connect with food companies, who may be able to pay farms that have better sustainability, and also to connect them to carbon marketplaces or even run carbon credit marketplaces. We spoke to many of the crop input producers doing these initiatives, pilot programs, before we wrote the report as part of process. After we wrote the report, they all agreed that this is the findings that they're finding as well. So it's not really controversial for them. But I think in a world where high level this sounds great - yeah, wow, we're meeting a lot of carbon in the world. And this is causing us lots of problems around climate change. Hey, what if we just change our farming practices, and we could sequester all that carbon in the soil, and everybody's happy. But we find out is what's controversial is it's blurry, the financial outcomes are complicated, and it's not as easy as everybody thought.

Camilla Sutton:

So Joel, can you walk us through what some of these sustainability practices really are on farm?

Joel Jackson:

Sure. So the first thing is no-till farming. So what you're doing is, instead of turning the soil over in the fall, you leave the soil alone. And you may have husks or waste or anything, and you just leave that alone. And by doing that, you're not letting carbon emit. So that makes your farmland not as clean, and not as set up to deliver high-yielding production in the subsequent spring and summer and fall. The second thing you will be doing is cover cropping or cover crop. So you'd be applying a planting crop across the winter, instead of normally just leaving the farmland barren or empty. By planting a crop, what you're doing is you're trapping the carbon in during the winter, but the crop that you're planting, the seed that you're planting, isn't for cash. So it's an upfront cost. And that's the problem with some of these systems is you're having new equipment, you're paying for seed costs across the winter, that's extra costs, you're not getting revenue back for it there’s other expenses too, and then you're getting yield losses. So those are the types of practices you're doing – no-till and cover cropping to try to sequester carbon.

Camilla Sutton:

So you highlight there's some pretty big barriers here. But really what would need to change for things like no tail or cover crops, and other sustainability practices to be more widely adopted?

Joel Jackson:

What you need are the incentives to get higher. So what are we talking about? If the price of carbon today is $15 or $20 a tonne for high-quality carbon credit, the government is going to have to offer more, or pilot programs or private companies have to offer more, or food companies are going to have to offer premiums to farms that follow sustainability practices. Doesn't happen overnight. And do food companies want to pay more for crop inputs? Of course they don't. Do consumers, most consumers, want to pay more for the food they consume? Do consumers want to pay $15 for a Big Mac combo? Of course they don't. But this is what has to happen. We 're gonna have to raise the price of food, and we're going to have to offer higher incentives for carbon sequestration. So this could mean companies that purchase carbon credits offset some of their own operations, think of a Shopify or Microsoft willing to pay more money are forced to pay more money to cover their own emissions.

Camilla Sutton:

So what will the impact of all of this be for the crop input producers and for fertilizers use going forward?

Joel Jackson:

A few things, Camilla. First, I would say that you might see a push for lower or more enhanced nitrogen fertilizer usage. So at least using products that will lead to less waste of nitrogen fertilizer and lower emissions for these companies. Also, as I mentioned earlier, they're developing software tools to help farmers manage this — manage carbon monitoring, and managing sustainability scores on your farm connected to carbon credit marketplaces, connecting you to food companies — those would be the main things that I think would benefit those companies.

Camilla Sutton:

So when it comes to agriculture, this seems like a huge change. What are the other themes and initiatives that we should be watching?

Joel Jackson:

As well and sort of related you're seeing a push to use more carbon free fertilizer, so carbon free nitrogen or lower carbon nitrogen, so ammonia or urea, and that would help to reduce actual carbon placed into the soil. And it would come at a premium but then hopefully, the farmer would get a carbon credit or food company paying them to have more a sustainable farm. Also what you're seeing in agriculture, and that's kind of early on days, but we're seeing companies start to build green and blue or low carbon nitrogen production plants in the US and elsewhere, it takes some years. The second thing would be something called biologicals or microbials. These are organic, or naturally occurring pesticides and fertilizers to help replace some of the functionality that seeds and synthetic fertilizer are doing. Also, early days a lot of products are out there. Some of these naturally occurring pesticides and fertilizers are difficult to replicate the same functionality in different soils in different regions and different weather. But definitely you're seeing that as one of the major pushes in ag tech.

Camilla Sutton:

All right, Joel, that brings us to the end of our podcast. We really appreciate you joining us today and sharing all this knowledge.

Joel Jackson: Thanks, Camilla.

Camilla Sutton: That was Joel Jackson, BMO Capital Markets Fertilizers and Chemicals analyst speaking to us about his August report, titled “Transitioning to On-Farm Carbon and Emissions Management”. BMO Capital Markets is proud to deliver a thoughtful analysis of upcoming Equity Research trends that will prove important to clients’ investment decisions through both its IN Tune podcast as well as their commodityspecific Metal Matters hosted by Colin Hamilton. If you enjoyed today's IN Tune podcast, please do subscribe and rate it.

Speaker 3:

The views expressed here are those of the participants and not those at bank of Montreal, its affiliates or subsidiaries. This is not intended to serve as a complete analysis of every material fact regarding any company, industry, strategy, or security. This presentation may contain for looking statements. Investors are cautioned, not to place undue reliance on such statements as actual results could vary. This presentation is for general information purposes only, and does not constitute investment legal or tax advice. And, is not intended as an endorsement of any specific investment, product, or service. Individual investors should consult with an investment tax and or legal professional about their personal situation. Past performance is not indicative of future results. To access our full disclosures, please visit researchglobal0.bmocapitalmarkets.com/public-disclosure.