To get an idea of a farm’s financial health, we check the balance sheet. It’s straightforward. On the one side are liabilities like loans and outstanding bills to suppliers. On the other are assets like inventory, cash, land, buildings and equipment. Then you simply subtract the liabilities from the assets to find net shareholders’ equity, or net worth of the operation.
In fact, financial institutions rely heavily on the balance sheet — rather than statements of revenue and expenses — to make lending decisions, with the upshot that the less you owe, and the more your farm assets are worth, the more you can borrow.
Of course, when you really need that loan is when self-financing is less of an option, i.e. when your debts are already substantial, and your farm equity still needs time to grow.
So wouldn’t it be nice if you could talk your bank into lending you more because your management practices are bumping up the asset value of your land?
In other words, wouldn’t it be great if your balance sheet could reflect the things you are doing to build soil health, sequester carbon, improve drainage/water quality, maintain grasslands or wetlands, and so much else besides?
The idea of “full-cost accounting” is far from new. But now it’s gaining traction among farm groups, and even among governments and private industry.
Full-cost accounting considers the environmental and social costs and benefits of activities that are usually seen as externalities. For example, short rotations might improve a farm’s near-term profitability by allowing more acres for high-priced crops, even though the practice will eventually limit your future choices and potentially hurt soil quality, thereby cutting yields no matter what you grow. There can be negative environmental impacts too, which could also devalue the asset over time.
On the other hand, management practices that build soil organic matter or that sequester carbon over the long term could either directly generate extra revenue (for example, if a price were fixed on carbon) or would increase the value of the land asset itself, increasing overall profitability and value of the farm.
The surprise, it seems, is that the environmental impacts might get on your balance sheet first.
The reward for ecosystem services
In order for full-cost accounting to become an accepted practice, there has to be not only general recognition from governments and the public that the ecosystem services farmers provide are of economic value to society as a whole, but there must also be mechanisms to generate tangible revenue or other value such as tax incentives that reward farmers generating them.
Although we aren’t yet seeing full-cost accounting appearing on producers’ books, it’s a concept that’s certainly not going away any time soon, says Darren Swanson of the International Institute for Sustainable Development (IISD).
It has taken time to get even this far, admits Swanson, who in 2004 co-authored one of the first papers exploring the concept of full-cost accounting for Agriculture and Agri-Food Canada (AAFC).
“We see more studies in terms of the valuation of ecological functions and services,” Swanson says. “There is considerable promise for the payment of ecosystem services, and I think it’s just a matter of time for both government and the general public to become comfortable with payment for those services. It’s not just a handout of cash, it’s not a subsidy, it is an efficient way to manage resources and mitigate costly environmental impacts. Market-based approaches will be the future of handling some of these issues.”
Some of those market-based mechanisms are already beginning to take shape, and at the forefront is ALUS Canada, which is providing farmers and ranchers payments for the ecosystem services they produce on their land.
“Currently we are paying our farmers and ranchers per acre based on land rental rates, so we are identifying the cost to produce ecosystem services,” says Bryan Gilvesy, executive director of ALUS Canada. “Our role is to go out in the world and find out what they are really worth. We are already discovering that they are worth at least the cost to produce them, and hopefully more.”
The ALUS program is snowballing across Canada. Six provinces, 19 different communities, and 722 farmers and ranchers are participating in a total of 18,200 projects.
Nine of those communities joined just this year, and Nova Scotia will do a pilot project next year.
Beside the direct income derived from the program, producers are finding ALUS is adding value in other ways. “A large number of the producers in the ALUS Canada system are self-marketing their products, and they are finding added value for the products from their land because they are differentiating themselves by participating in the program,” says Gilvesy.
What’s important for farmers to understand is the ecosystem services they produce have potential value to corporations that are increasingly required to prove their corporate social responsibility, to report on the environmental impact of their activities, and to adopt full-cost accounting principles.
“ALUS Canada is trying to define the value of ecosystem services in the marketplace,” says Gilvesy. “That’s where it’s heading.”
From that, it is just one short step to adding some real numbers to your balance sheet.
No one is actually predicting when it will happen, but what’s certain is that ALUS is determined to provide producers with more options to increase short-term income and create long-term value for their farms.
“A year or two ago the only option a farmer had to increase revenue or the value of the land was to grow more crop,” says Gilvesy. “What ALUS Canada is bringing to the conversation is that, for the first time, a farmer has the choice to look at a natural area, and say I can clear it and produce more bushels of crop, or I can produce ecosystem services to create more value.”
A dollar value for carbon
The value of sequestering carbon on farms has been the subject of debate for decades but many observers feel we are now moving closer to putting a dollar value on it in the marketplace.
“The agricultural community is waking up to the fact that when they sequester carbon there are going to be markets where they will get a cheque for it,” says Gilvesy. “At the same time, they’re building soil organic matter (SOM), and their soil becomes more productive. So a clear relationship will develop in terms of how much SOM you have and how that increases the value of the land.”
Some producers, like Saskatchewan cattle producer, Blain Hjertaas, are already preparing for the day when carbon is worth dollars in the marketplace, and he knows exactly how much he will have to sell. Hjertaas is involved in a study co-ordinated by soilcarboncoalition.org, which is measuring carbon change over 10 years at around 300 farm sites in North America, 30 of which are in Western Canada, including at Hjertaas’s farm near Redvers.
Hjertaas has an intensive grazing management system which increases soil organic matter and maximizes carbon sequestration. Hjertaas calculates that his land sequesters 22,800 kilograms per hectare of CO2 annually. Other Saskatchewan cattle producers have shown even higher carbon sequestration rates — up to 48.85 tonnes per hectare a year.
“The goal of this initiative is to prove to society that this kind of farming sequesters a lot of carbon, and that is a very valuable ecological service to all of society that I am not getting paid for,” says Hjertaas. “Carbon is worth a lot of money to society, and farmers should be seeing some of that value because we can reverse carbon emissions by putting it back into the soil where it can do some good.”
New research is also showing how grain farmers can create value through adapting their management systems. Dr. Stuart Grandy’s team at the University of New Hampshire is providing a new understanding of how organic matter forms. The work is showing that longer, diverse rotations which include cover crops such as clover build soil microbial communities and quickly generate organic matter.
In a trial involving an organic and conventional rotations, both converted 55 per cent and 45 per cent respectively of carbon inputs into sequestered, stable, soil carbon that can remain in the ground for a very long time.
No land will be sold without a soil test
Here’s a thought experiment. If we applied full-cost accounting to the last 100 years of agricultural production, what would the environmental cost be of the loss of organic matter in our soils?
Manitoba Grazing Club co-ordinator, Michael Thiele says he’d like to know. “That loss of organic matter has affected our ability to hold water and nutrients, our ability to grow nutrient-rich food, and our ability to have a resilient system when it’s hot, or cold, or dry or wet,” he says. “It’s hard to put a dollar value on those things. It’s not just about the pounds of nitrogen, or the bushels per acre, or the pounds of beef per acre. Full-cost accounting is much more than that.”
Thiele believes we’re moving toward a day when land values will be determined by what’s under the ground, rather than what’s on top. “I can see that in the future. No land will be bought and sold without a soil test that indicates the state of the soil biology, and the SOM and carbon content,” says Thiele. “Land which has been managed to increase these things will be worth more. There’s no doubt about it.”
Maintaining grasslands and forages is another ecosystem service that various groups and governments are seeking to valuate. A 2012 report — The National Forage and Grassland Assessment — concluded the economic value of forage crops in Canada was $5.09 billion, and that forages underpin our dairy and beef industries, which together contribute $11 billion in direct value to Canadian farmers and generate over $50 billion in economic activity.
Provincial studies in Alberta and Saskatchewan estimated the value of indirect benefits, such as environmental enhancements, could be worth at least as much as the direct benefits.
“If you take into account some of the initial estimates that have been made on the value of ecological goods and services provided by forages and grasslands, it is as much or more than the farm gate value of the forages,” says Henry Nelson, vice-chair of the Manitoba Forage and Grasslands Association (MFGA) and co-chair of the Canadian Forage & Grassland Association (CFGA) environment committee.
“If we were being paid so much a tonne for the carbon we sequester, these forages and grasslands would be worth double — around $10 billion to $12 billion. It demonstrates that forages and grasslands are a significant contributor to our economy,” Nelson says. “But they’re not a cash return, because those returns come back through livestock sales and dairy products that we sell.”
Forages are being left out of the picture with the economic system we have in place today, and Nelson says that is probably a big factor in why we are losing so many of them, which is creating more negative externalities that will eventually have to be accounted for by society one way or another.
“It will cost us due to flooding and droughts because the land doesn’t have the capacity to hold water, and our infrastructure can’t handle the volumes,” Nelson says. “Then we are spending a lot of money through AgriRecovery and other programs to assist farmers.”
Nelson adds that forage groups are working to document these grassland values and to get that information out to the general public so they understand the value of maintaining these natural resources.
“We want to do the analysis to show that although it seems more attractive to work these crops up, this is what it is actually costing us,” Nelson says. “Then we want to look at some policy alternatives and market instruments that will help to reduce the loss of grasslands. But it’s got to be programs that are revenue based.” It squares with Gilvesy’s thinking. “Dollars are the only metric we have,” he says. “As corporations do more full-cost accounting and understand their landscape impact, they are looking for solutions to mitigate them, and ALUS is representing the farmers of Canada as an obvious answer to help support them to achieve those goals.”