How can natural capital markets benefit farmers and landowners

We invited ffinlo Costain, Chief Editor of 8point9.com, to write about natural capital opportunities and how they might be stacked alongside other land uses for farmers and landowners.

How can natural capital markets benefit farmers and landowners

by ffinlo Costain

Land-based businesses are facing a time of significant challenge. Farming in particular faces reduced public financial support which, given rising costs, pricing pressures and a flurry of policy changes to adapt to, feels like an existential threat for many.

In response, farmers and other landowners are learning to accept that whilst food production may remain at the core of their businesses, diversification will provide increased structural and financial resilience for their families and landholdings in the future.

Natural capital markets – the opportunity to trade environmental enhancements delivered by adopting new land management practices - provides a route for farmers to stack nature-related services and income streams alongside food production.

Filling the Funding Gap

8point9’s current Farm Gate podcast series – Filling the Funding Gap, sets out to discover how these markets can help farmers spread their financial risk and increase their income.

We wanted to know how entering natural capital markets can help farmers to fill the gap between public payments and the actual costs of transition towards sustainable and regenerative agriculture.

Across ten episodes, expert panellists discuss the opportunities associated with different nature markets – for example soil carbon, biodiversity credits and water management.

Throughout the series we speak to a wide variety of expert panellists. These include Martin Lines (Nature Friendly Farming Network), Peter Harker (Saffery), Emma Toovey (Environment Bank), George Hepburne-Scott (Forest Carbon), Andy Cato (Wildfarmed), Lee Truelove (First Milk) and many more subject specialists.

Importantly, natural capital services – whether for carbon drawdown, nature regeneration or energy production; should not be seen as alternatives to food production, pushing farming to the margins. Rather, they are new income streams that enable food production to continue on a particular landholding.

How much can nature pay farmers?

In our first episode, we discuss how nature markets can become robust and regular income streams, providing some or even all of a farm’s income. We concluded that rather than exchanging reliance on food supply chains for nature supply chains, farmers would be better advised to integrate or stack natural capital opportunities with more traditional farm activity.

Baselining

While baselining a farm’s current situation (in terms of measures like soil carbon, water infiltration, worm counts, and bird life) is critical to be able to demonstrate future improvements, we found that business planning should be the priority.

How profitable are current income streams? What sort of land is available? Are there areas of habitat already in place? What could available land generate in terms of environmental outcomes? What equipment and human resources are available?

These are all questions that should be answered before a farmer or land manager begins to map out and select potential income streams from markets, grants, and other sources.

Soil carbon

Access to soil carbon markets is nearly always through a third party. Many farmers and land managers will have been approached by companies promising soil carbon assessments and offering to sell credits on the soil carbon market.

In our programme, How do I measure and sell soil carbon? our panel explains how the soil carbon market functions and how farmers can identify companies that are reliable. We found that soil carbon credits can also have greater value if they’re delivered in tandem with biodiversity improvements.

We looked at the five main categories of natural capital actions that farmers could consider.

Nature credits

Nature credits refer to the practice of enhancing, creating, and maintaining habitats to accommodate flora and fauna, trading the ‘uplift’ in habitat value generated and the ongoing maintenance of those habitats.

In the UK, there are statutory and voluntary nature credit markets. Statutory markets – those that are legally established, include biodiversity net gain (BNG). Since 2024, new housing developments must deliver 110 per cent of the biodiversity that existed prior to development. This can be delivered on-site, or off-site. If it's delivered off-site, then credits will be purchased from farmers who promise to manage their land to benefit nature over the next thirty years. BNG credits will often be sold through a habitat bank, for example, Environment Bank.

Voluntary nature credits can also be sold, again often via habitat banks. Castle Howard’s new Bog Hall Habitat Bank is a good example. Castle Howard has taken 440 acres of low-yielding agricultural land out of production and has a plan to manage it for nature regeneration over the next 30 years. Parcels of land, ranging in size, will be sold as biodiversity units to companies that want to demonstrate their commitment to nature recovery as part of meeting their Environmental, Social, and Governance (ESG) objectives.

Water management

There are several options available for farmers who want to improve water management on their land. Water companies generally have small grant schemes that support interventions and help to reduce nutrient loading and runoff – though these schemes are company and location-specific.

Other funding options are emerging too. Farmers working in key catchments who produce wheat for a regenerative sliced-bread producer, Wildfarmed, are being paid per-hectare maintenance payments by several water companies because the Wildfarmed approach uses no fertilisers or pesticides.

Nestlé is running a trial in Pembrokeshire, paying thirty First Milk farmers to improve water infiltration in their soils. The company aims to ensure that the water table is constantly replenished near its Prince’s Gate bottled water plant.

Energy production

Key opportunities for farmers are centered on solar, wind, and anaerobic digestion.

Most farmers have lots of roof space as well as fields, and solar arrays can reduce or even eliminate electricity costs on farms. Direct-wire relationships can provide the chance to produce electricity for nearby communities or industrial facilities.

In our programme, Tapping into wind and solar, Solar Energy UK points out that even though field-based solar arrays take some land out of food production, the income that they guarantee can provide a safety net for farmers, which helps them to continue farming on the rest of their land.

Wind turbines also provide opportunities – companies will pay farmers for ground rental and easements and may sometimes offer a percentage of the value of the electricity generated, and with an end to the de facto ban on in-shore wind, this opportunity has resurfaced as an option for landowners.

Whilst there is a visual impact to consider, both solar and wind can be integrated with livestock production.

Finally, depending on the amount and type of waste that is produced on a farm, small anaerobic digesters can provide cost-effective sources of both electricity and heat.

Woodland

England has a target to increase the level of tree cover by up to half a million hectares by 2025. Woodland delivers multiple benefits for farmers. By integrating trees within livestock and arable systems, farmers can reduce input costs by improving water management and soil health, by creating shade and shelter, and by growing fruit and fodder.

Broadleaf woodland can be planted and managed to produce habitat and nature credits – while conifers can be grown to produce timber and carbon credits. Land can also be sold or leased to forestry companies.

Creating resilience

Our podcast series confirmed that the natural capital opportunities available to farmers and other land managers are highly significant, and in most cases can be delivered alongside farming activities.

By diversifying farm income streams and stacking natural capital opportunities, farmers and landowners can spread their financial risks and create long-term resilience for their businesses.

While there are those who worry that nature markets put food security at risk, this is a false dichotomy. Nature market incomes can help to ensure that farmers are able to continue farming – and delivery can often be integrated or stacked with food production.

In addition, food security depends upon ecological security. It is essential that we take action to mitigate climate change, adapt to extreme weather, regenerate biodiversity and re-establish soil health. By engaging with natural capital markets, farmers can be paid fairly to deliver this critical nature recovery.

Our podcast series, Filling the Funding Gap, can be found by clicking the podcast link on 8point9.com - or by searching for ‘Farm Gate’ wherever you get your podcasts.

8point9, the land use news channel, is sponsored by Rural Solutions – and our Filling the Funding Gap podcast series was sponsored by Barclays UK, Environment Bank, Forest Carbon Ltd, Howden Insurance Brokers, Regenerate Outcomes and Saffery. Farm Gate is part of 8point9.com.