Natural Capital’s contribution to production

You can’t manage what you don’t know – Natural Capital’s contribution to production

Ogilvy S¹, Broadhurst D², Hawdon A¹ and Tuckett I²

¹ Farming for the Future, Gundaroo, NSW 2620. hello@fftf.org.au

² Perth Region NRM Inc., Bentley WA 6102. info@perthnrm.com

Abstract

A major enabler to transition towards a more prosperous, resilient, and sustainable agricultural sector is an improved understanding of the role natural capital (NC) plays in generating benefits for agricultural businesses and farming families, and increased capability to incorporate NC into farm business management decisions. The Farming for the Future (FFTF) Livestock Pilot Program provides repeatable evidence-based assessments to monitor NC changes on-farm, which is critical for informed decision making and validation of commonly recommended regenerative practices.

This paper will discuss the demonstrated linkages of NC’s contribution to farm production. The trial produced 113 farm accounts that collected natural capital, financial and production data across Australia including 38 in Western Australia (WA). The results show –

• Different ‘benefit pathways’ through which NC can support farm businesses, including improving productivity, and/or by reducing input costs;
• Most of the relationships between NC and farm business performance observed were positive and linear. This means that most farms sampled, and similar farms within the broader farming population, could improve their business outcomes by improving their NC;
• Landholder surveys show that the potential for private financial benefits is the most compelling reason for farmers to invest in NC improvements; and
• Delivering insights into NC-farm business relationships across a broader range of focus regions and enterprise types would help to drive large-scale industry adoption of improved NC management (+38% of farms beyond forecast baseline levels).

Keywords

Natural Capital, Natural Capital Accounting, On-Farm Natural Capital, Productivity, Sustainability.

Introduction

This paper is drawn from the project final report produced by the Farming for the Future team titled “An impact focussed research and change program for Australian producers (2024)” funded by Meat and Livestock Australia, Australian Wool Innovation and philanthropic sources.

All West Australian farmers have made significant contributions to producing high-quality food and fibre and have been crucial in advancing our agricultural industry, leading the way in innovation, sustainability, and climate resilience. There is broad industry acceptance that enhancing natural capital contributes a cheap alternative to costly inputs for modern farming systems (Gregg and Rolfe 2016, LaCanne and Lundgren 2018, Fenster et al. 2021). Properly managing farm soils, water, livestock and groundcovers (on-farm natural capital) can potentially prolong farm sustainability, increase outputs, reduce inputs and increase climate resilience (Ogilvy et al. 2024). Whilst natural capital’s contribution is well researched in an experimental setting, our understanding of the full relationship between natural capital and farm performance remains unknown and a critical area for future investment and research. Though there are multiple methods of measuring on-farm natural capital and the intrinsic knowledge of the land manager, there is limited information particularly in WA on the target levels required to make informed management decisions.

It is hypothesised that the financial contribution of on-farm natural capital to production is large relative to the economic opportunity presented by alternative income streams like carbon and biodiversity markets. It is believed that increasing producers’ knowledge of the benefits natural capital can contribute to farm production will help to drive large-scale industry adoption of improved natural capital management practices. This will enable the agriculture sector to play an active role as a nature-based solution to climate resilience and biodiversity loss for Australia.

Between 2019 and 2023, a national research program led by Farming for the Future (FFTF) has been seeking to link farm natural capital and its contribution to farm productivity. The program is a public good research and change activation program that has been established as a response to the increasing urgency for agriculture to play an active role as a nature-based solution to climate and biodiversity loss for Australia whilst continuing to produce high quality food and fibre. The vision is to transform Australia’s agriculture sector into one that empowers producers to evolve their farm businesses in ways that maintain and enhance their natural capital to build resilience and improve profitability.

Methods

The FFTF Livestock Pilot Program has primarily focused its research activities on livestock operations in selected agricultural regions of NSW, Victoria, Tasmania and the south of Western Australia. It has collected data from 130 farming businesses (note only 113 participants had the required 5-years production and financial information and have been included in the study) whose operations are representative of the range of natural capital types, and enterprise size in these regions. In WA, a total of 35 farm audits were conducted by Perth NRM across multiple landscape types and farming enterprises that included livestock, viticulture, horticulture and mixed cropping-grazing.

The data captured and recorded included natural capital, financial, and production data, using a combination of remote sensing technology, field surveys, and producer interviews. The program used statistical analysis (data envelope analysis) and benchmarking approaches to quantify relationships between natural capital and farm business performance, and to identify beneficial pathways and associated management actions that can improve both natural capital and farm performance across a range of spatial settings.

Prior to visiting the farm, each farm was mapped to paddock level and remote sensing analysis was used to generate canopy cover and ground cover maps over a 5-year period.  These maps were then used to classify the farm into ecosystem units. This information was used to plan on-ground ecological and forage condition assessments at 20 – 30 sample points per farm to provide a representative sample of each ecosystem unit.  The collected data was then used to assign each visited point to a condition state within a state and transition model. This was used, together with farm management information, to impute condition states to other points on the farm that were not visited.

Results

The FFTF Livestock Pilot Program has provided the first large scale evidence of a positive relationship between natural capital and farm performance. Key findings included –

• Landholder surveys suggested that private financial benefits are the strongest motivator for producers to invest in natural capital improvements;
• Analysis of 113 livestock farms indicated that natural capital is positively correlated with production efficiency across a number of natural capital indices (e.g. soil condition, connectivity and forage condition) providing evidence of a ‘double dividend zone’;
• Identified different beneficial pathways through which natural capital can support farm businesses, including improving productivity, maintaining or building profit, and/or by reducing input costs;
• High natural capital farms also had lower input costs across certain categories examined (energy, fodder, health, and labour). The program suggests that natural capital may support production efficiency by replacing/substituting for some of these inputs;
• Natural capital was positively correlated with financial performance (gross margin and Earnings Before Interest and Taxes or EBIT). Optimised natural capital levels delivered higher EBIT with ~$70 /ha/yr higher in WA. Differences in gross margin were of a similar magnitude;
• High natural capital was also associated with higher levels of resilience to both climate and market shocks. Natural capital may help build climate resilience by enabling higher levels of water retention in soils, suggesting financial resilience and improve financial performance. This is because natural capital inputs tend to be low-cost relative to manufactured inputs, and their ‘price’ is not subject to volatility of international market shocks or input supply chain disruptions;
• Each individual farm type showed a positive association with natural capital across some or all the range of natural capital scores measured. Given that our farm sample was representative of farms present in the broader study area, this suggests that most farms could improve one (or usually more) elements of natural capital to improve livestock production efficiency (although the program notes that larger sample sizes and additional analyses are necessary to establish causal relationships); and
• The program also identified evidence of a ‘trade-off zone’ for some elements of natural capital in some farm types (Ecological Condition and Vegetation Aggregation for productivity benefits; Ground Cover and Connectivity for profitability benefits), suggesting a role for natural capital markets or incentives in a limited set of circumstances.

Benefits to industry

FFTF provides the measurement protocols, evidence base, tools, and resources for producers to manage their natural capital in a way that builds more profitable and climate-resilient farm businesses. These outputs also provide producers with the capacity to report natural capital baselines and associated improvements through time to supply chains, industry bodies and other relevant parties and associated market opportunities.

FFTF engages the farm advisory/accounting industry as its key pathway for sharing information and insights and collaborates with a diverse network of industry partners. By building capacity across all relevant stakeholders, FFTF and partners like Perth NRM Inc. and RegenWA Ltd are catalysing large scale adoption of beneficial land management practices, and helping to build a more financially prosperous, climate-resilient, and environmentally positive agriculture sector for Australia.

Every participating farmer has received a bespoke farm-scale natural capital report and will shortly receive their economic report. Together these outputs will support exploration of natural capital management interventions to improve business performance supported by farm advisors.  Combining information from the economic report and broader dataset with their own expertise and local knowledge. Each report can also support negotiations with financial service providers, providing a view of environmental risk.

Completing the FFTF data set of 400 farms and delivering insights into natural capital-farm business relationships across a broader range of focus regions and enterprise types could help drive large-scale industry adoption of improved natural capital management (+38% of farms beyond forecast baseline levels).

Discussion

The national FFTF program has demonstrated the hypothesis that on-farm natural capital has a positive impact on farm productivity particularly in the ‘double dividend zone’. The act of maintaining or enhancing on-farm natural capital results provides evidence for a business case of three pathways that project participants (farmers) nominated as their primary motivation for participating: production, profit and resilience.

It has also highlighted the need to increase the number of farms audits and more data across new agricultural enterprises to further refine and validate the methodology, to include new farming regions (e.g. Queensland) and to include or refine new aspects of farm auditing (e.g. soils, water, fauna etc.).

The audit reports provided to the farmers assisted them to better understand their on-farm natural capital, the individual ecosystem types within their farm and its role within their farming system.

Ultimately farmers now have an evidence-based baseline of their farm that can be used to prioritise activities, highlight areas with positive or negative impacts, serve as a risk mitigation plan, and provide leverage when negotiating with financial or insurance providers.

Implications

Data analysis for this Livestock Pilot Program focused on trends in business performance associated with increasing levels of natural capital within different farming enterprises. This allowed the investigation of whether and how producers might benefit from improved natural capital, irrespective of their current production mode or starting point. Additional industry-level insights may be gained by comparing performance across different farm types. This is a much larger question with important implications for production trade-offs (for example between farm size, stocking rates and production efficiency) at the industry-scale. Future analyses based on larger sample sizes will aim to address these important issues.

Accordingly, the next research phase will include sampling an additional 170 farms in the existing focus regions and an additional 100 new farms in new focus areas including Queensland and South Australia. Over the next 5 years, the program sees the need to continue to expand research activities to include 1,500 livestock, cropping and mixed cropping-grazing farming enterprises across all Australian states and territories to achieve these aims. This will enable the creation of a dataset that is representative of the breadth of operations and farm types, sizes, and locations across the Australian agricultural sector. In doing so it will help build a financially prosperous, climate-resilient, and de-carbonising agriculture sector for Australia.

Additional Information and references

Farming for the Future – https://farmingforthefuture.org.au/

RegenWA Ltd – https://www.regenwa.com/

Fenster, TL, Oikawa, P & Lundgren, JG 2021, ‘Regenerative almond production systems improve soil health, biodiversity, and profit’, Frontiers in Sustainable Food Systems, p. 5:664359

Gregg, D & Rolfe, J 2016. ‘The value of environmental health across conditional efficiency quantiles’, Ecological Economics, 128: 44-54.

LaCanne, CE & Lundgren, JG 2018, ‘Regenerative agriculture: merging farming and natural resource conservation profitably’, PeerJ, vol. 6, p. e4428

Ogilvy, S, Heagney, E, & Gregg, D, 2024 ‘An impact focussed research and change program for Australian producers’ MLA Final Report, pp. 21.