In the next two years, California may not have enough water to sustain its current tomato harvest, thanks to both groundwater overdraft and climate change. That’s a procurement nightmare: 95 percent of the country’s tomatoes are grown within just a few hundred miles in the state.
With no intervention, food companies will see a hit to quality, a price spike, or both. Even worse: tomatoes are the canary in the coal mine. Supply chain risks are an increasing threat to food companies around the globe.
Luckily, CPG procurement and sustainability teams are joining forces to address supply risks. Their collaborations can set a precedent for how supply chain resilience and sustainability can work hand in hand.
One popular form of mitigation is to finance the farmer transition to sustainable agriculture practices: when food companies incentivize practices that preserve or expand current yield potential, everyone wins.
But the pay-for-practice model many have relied on in the past is no longer financially viable in light of disappearing federal subsidies.
The good news: there are a variety of other financial tools food companies can use to incentivize sustainable agriculture practices and protect their supply sheds. In this piece, I’ll introduce three, explain how food companies can adopt them, and provide an overview of the parties involved. I’ll also include an example of how a company could make it work.
The Resilient Supply Chain Ecosystem: 5 Key Players
Federal programs like Climate Smart Commodities, which included primarily per-acre, pay-for-practice incentives, have supported many food companies’ farmer incentive programs to date. But they were never meant to exist in perpetuity.
Instead, the goal was to encourage short- and medium-term private investment. The expectation was that food companies and other supply chain players would establish their own long-term financing and incentive structures to fund sustainability and procurement programs.
With the status of federal funds now uncertain, food companies are scrambling to launch their own incentive programs faster than initially anticipated. Parties involved in incentive programs that food companies are developing can include:
- Project developers: These groups work with large corporations (like tech companies and food companies) interested in water stewardship, sequestering or reducing carbon, or otherwise managing risk in their supply chain. They collect data to quantify the impact of regenerative ag techniques and connect offtakers of environmental outcomes with farmers implementing contributing practices.
- Farmer-facing groups: These organizations collaborate with farmers and offtakers. They provide technical assistance on the implementation of sustainable and regenerative ag practices. There are a variety of farmer-facing groups, ranging from non-profits to certified crop advisors to ag retailers to state-level subsidiaries of commodity groups.
- Biological companies: These manufacturers produce crop protection and nutrition products made from natural (i.e., non-synthetic) ingredients that, for example, use less nitrogen than conventional inputs. In combination with sustainable practices, their products can help preserve soil health while mitigating greenhouse gases.
- Agrifinance partners: These groups (like Growers Edge) offer custom-built financial products designed to facilitate the flow of capital to farmers transitioning to sustainable and regen ag practices.
- Agricultural retailers: Farmers purchase crop inputs directly from agricultural retailers. As such, these retailers can be an excellent partner for distributing financial products, inputs, and technical assistance.
Now let’s take a look at the options for incentivizing farmers to adopt practices that will mitigate the biggest risks currently threatening food companies’ supply chains.
3 Financial Products to Mitigate Food-Related Supply Chain Risk
Crop Plan Warranty
What it is: This yield warranty guarantees a farmer’s harvest when using new products or practices. If the farmer’s yield using the new practices or products specified in the warranty doesn’t reach a certain threshold (based on historical performance), the warranty pays the farmer a financial benefit.
Crop Plan Warranty is a targeted financing tool that directly addresses the risk associated with the first few years of implementing conservation practices or the perceived risk of trying new products like biologicals. The warranty’s risk mitigant capacity is a key lever for transitioning middle adopters and is a blind spot that pay-for-practice or pay-for-outcome programs miss.
How it works: Food companies create a warranty to address a specific supply shed risk. For example: increasing cover cropping to break up compacted soil and improve moisture absorption and retention later into the dry season, therefore enabling tomato yields in California.
This involves several parties:
- Farmer-facing groups help make farmers aware of this opportunity.
- An agrifinance company provides the backend support for the warranty, management, administration, and payout if yields dip.
- Project developers or internal teams at CPGs provide carbon, water, or other environmental data collection and management.
- Biological manufacturers can plug in new products if aligned with farmer and offtaker needs.
- Farmer-facing groups provide technical assistance for enrolled farmers to ensure they know how to implement cover cropping (or any other covered product or practice).
- The food company pays for the upfront, per-acre fee for the warranty.
- Farmers farm and harvest. In the event of yield shortages, they collect cash payment from the agrifinance company.
Input Financing
What it is: Financing available directly to farmers to purchase crop inputs (seeds, fertilizers, crop protection, etc.). Input financing makes up roughly 20 percent of the average row crop farmer’s financing for a crop year, excluding mortgage, operating, equipment and other lending products. Input finance is a significant lever for supporting adoption of new or innovative inputs.
How it works: Typically distributed via a retailer, input financing grants farmers a line of credit they can tap during purchasing season. Payments are generally due at harvest. These loans are revolving; if a farmer repays part of their loan before it comes due, they can tap the financing line to make additional purchases.
- A food company can coordinate with a retailer to buy down interest rates so that farmers can access inputs even more easily, for an even lower cost.
- When used in combination with a Crop Plan Warranty, input financing can significantly reduce the financial burden on farmers implementing regenerative and sustainable ag practices.
SaaS Water Intelligence (Agcor)
What it is: A software platform that includes geospatial data, including water and wildfire intelligence. It’s an essential planning tool for any food company attempting to de-risk and climate-proof its supply shed.
How it works: Food companies can use Agcor to understand current and future yield capacity for specific plots of land. Projections are based on proprietary data sets that include information on soil health, water availability, past harvests, weather, markets, and more.
With explicit, time-bound assessments of the future productivity of specific parcels, food companies can tailor farmer incentives to the exact growers who need them.
Real-World Example: How a Food Company Could Mitigate Supply Chain Risk
Now let’s take a look at a real-world example of how a food company could use these innovative financial products to mitigate supply chain risk and protect its future procurement efforts.
A major food company wants to secure future tomato harvests. To do that, it settles on a three-pronged approach.
First, it finances a Crop Plan Warranty to incentivize cover cropping among its farmer suppliers. Cover cropping helps soil retain water and so prolongs land’s ability to maintain yields. By incentivizing farmers to adopt the practice, the food company secures future harvests of crops grown on that land.
Second, the company adapts the warranty to also require the use of a biological fertilizer that boosts yields with less acreage. Attaching the warranty to both a product and a practice benefits all parties:
- Farmers are more likely to see strong yields and have a profitable season.
- The food company is more likely to have adequate supply this year and in future years.
- The biological manufacturer can overcome farmer hesitancy about trying new products.
Finally, the food company works with a farmer-facing group to ensure that enrolled farmers get the guidance, coaching, and technical support they need to adopt cover cropping and apply the biological input correctly. This greatly increases the likelihood of success. It also reduces farmer anxiety about enrolling in such a program in the first place.
Protect Your Supply Chain. Think Beyond Pay for Practice
The threats to tomato companies right now are near and present. Within the next 24 months, California may no longer be able to support procurement needs at today’s levels or at today’s prices.
But as of today, that threat – and the others likely to follow – can still be mitigated. By acting now, food companies can help fuel the transition to agricultural practices that will preserve groundwater levels and sustain viability for tomato production well into the future. The key is to implement tools custom-built for this purpose – products like yield warranties, input financing, and others.
For more information on how to use these tools to finance the transition to sustainable agriculture across other crops and geographies, get in touch.