28 MAY / JUNE 2021 Carbon Credits The new cash crop Brady Brewer, Ph.D. Assistant Professor, Agricultural Economics Purdue University brewer94@purdue.edu AG BANKING Markets are now on the rise, and Indiana farmers are seeing the light at the end of the tunnel. With strong soybean and corn prices at planting time, farmers have a positive outlook for the 2021 growing season. Purdue’s Ag Barometer, a monthly survey of farmers’ perceptions of the agricultural economy, showed an increase in early April. This increase in expectations was driven by a rise in the index of current and future expectations. In short, farmers seem well-positioned now and also expect success in the near future. This is a welcome relief to an agricultural sector that is coming off years of record government assistance that has kept a substantial number of farmers in business and their loans paid. Indeed, many in the agricultural sector were concerned as the percentage of farmer income from government payments increased to over 40%. This has created debate over how farmers would make up for the lack of government payment revenue, since the Biden administration has yet to announce any plans for continuing the aid seen under the previous administration. Enter carbon credits, the next big shakeup in the agricultural markets that has already started to turn heads. The Biden administration, under the Climate 21 Project, has plans to create a carbon bank that would be used to pay farmers to capture carbon from the atmosphere, a system called an agricultural ecosystem credit market. While the specifics remain unclear, there is enough information to draw both criticism and support from both sides of the political aisle. What we do know is that this plan has the potential to significantly influence farmers’ income statements, and the ag lending community should be paying attention. In these ecosystem credit markets, farmers are typically the sellers of carbon credits. They would get paid for using animal and land management techniques that meet certain ecosystem benefit criteria. Practices that may qualify include cover crops, livestock grazing, crop rotation, no-till and strip-till, nutrient management plans and buffer strips, to name a few. Farmers would be paid based on a set of outcomes on a per-acre basis. These credits that the farmers generate could then be purchased by buyers in the market. There are, however, some obvious issues to implementing these credit markets: • There are barriers to farmers adopting these practices as cost-effective management practices. There needs to be a measurable benefit to entice farmers to adopt. • The pricing of these credits has yet to be determined. Whether there will be a standard price for a certain practice, or if the size and scope of adoption will factor in, is up for debate. • A verification system will need to be put into place. Procedures to verify that the carbon was sequestered, and that the farmer followed proper practices, will need to be developed. How will this system affect banks? First, as stated earlier, these practices will come with a price tag, and farmers may need help financing these new production practices. Lenders need to be knowledgeable about how these practices may change the risk profile of the farm. Second, these markets represent a new source of income for the farmer. While we don’t yet know the specifics, it does appear that this would be a net positive for farmers who adopt these practices – which is good news for farmers and their lending institutions alike. HB
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