Carbon credit prices: ‘Supply and demand have no idea where to meet’ – Truterra

Prices being paid for carbon credits derived from agricultural practices such as regenerative farming methods are the product of an “arbitrary” market, Truterra sustainability manager Nick Reinke told sister title Agri Investor.

The Land O’Lakes subsidiary partnered last month with Nori, a start-up developing carbon sequestration and removal markets that received an investment from VC firm Tenacious Ventures in September.

The pair have launched a pilot program to create carbon credits with farm data provided to Truterra’s Insights Engine, an analytics platform designed to inform agronomic decisions around implementing and monetizing regenerative practices down to the individual field level. Producers enrolled in the pilot retain ownership of the data provided to Insights Engine, where their adoption of carbon-sequestering farming practices is recorded and translated into credits Nori has marketed at $15 per ton.

“Farmers are largely price takers on this stuff, it’s going to be the demand side of the market that sets the price, at least in the early term,” said Reinke, who spent nine years in crop insurance related positions with Saint Paul, Minnesota-headquartered Bremer Bank before joining Truterra in February, according to his LinkedIn profile.

“It’s hard to say whether or not there are truly identified market forces that have defined that price because clearly, this is price discovery phase. We are a long way away from a free-flowing market, so supply and demand have no idea where each other meet. It’s a bit arbitrary at this point.”

Last month, Flagship Pioneering-backed Indigo Agriculture announced it had a secured its first commitments to purchase ag-derived carbon credits at a price of $20 per ton.

Practice changes necessary for farmers to generate carbon credits can cost approximately between $40 and $60 per acre, Reinke explained, meaning carbon credits alone are unlikely to incentivize those changes. Instead, he added, Truterra encourages producers combine income from carbon credits with other incentives and cost offsets available to them, a strategy also being pursued by the Cargill-backed Soil and Water Outcomes Fund.

Reinke highlighted a September report from the US Commodities Futures Trading Commission as among key drivers of recent interest in carbon offset markets. CFTC’s report listed implementation of an economy-wide price on carbon as its top recommendation, calling it “the single most important step to manage climate risk and drive the appropriate allocation of capital.”

Reinke said he sees evidence of some corporates in the market buying ahead of regulations they see an inevitable and others attempting to stave it off by demonstrating an ability to curb emissions independently. Expectations that prices for carbon credits will rise, he said, are widespread.

“Based on the way that some of the big players in this space are treating the carbon credits, to me it feels like there is an aspect of a hedge happening,” he said. “Essentially, they are buying up a lot of carbon credits at current market prices, which seems like an indication that they expect future higher prices, potentially.”

Ground truthing supply

Amid recently surging demand, Reinke said, standards and methodologies bodies are currently focused on ensuring continued supply of carbon credits that large companies can use to supplement direct emissions reductions carried out inside and outside of their own supply chains.

Farmland and impact funds considering their role in the market, said Reinke, should begin with a consideration of whether or not they need to claim the benefit of carbon credits derived from changes they work together with tenants to carry out.

“CPG companies are going be motivated to claim the benefit of the carbon credit against their footprint, but the place where we can really use entities are the ones that will be able to speak to the number of practices changes, or acres or credits that they have impacted without needing to be ultimate recipient of that credit,” Reinke said.

The pace of the market’s overall development, he said, will ultimately be determined by judgements on the different processes for ensuring the validity of regenerative practices underlying the credits’ value.

“Part of that comes down to additionality; proving that this is a practice change that would not have otherwise happened,” Reinke explained. “There are going to be a lot of intense conversation around this concept of double counting.”

For ag retailers and food businesses such as Campbell Soup Company, Nestlé Purina and  food and ingredient supplier Tate & Lyle, which have partnered with Truterra to design and implement sustainability programs, the platform provides information that can help them demonstrate to consumers how they are working with farmers to improve air, water and soil health, he explained.

While the remote sensing and satellite imagery technologies play a role in this, direct communication with producers is still required. “You need to have that opportunity to connect directly with the farmer, through their trusted advisors and agronomist networks, to say: ‘What is actually happening on this farm? How are we driving value back to the farmer in exchange for that relationship?’” Reinke said.

“This is not purely-remote data that we are coming in with and guessing at a credit. We are actually ground-truthing with soil testing data and cross referencing that against the modeling that creates these credits.”

Due in part to the large number of acres any carbon farming program would need to encompass to be worthwhile, explained Reinke, peer-reviewed models and projections are involved in both helping farmers understand their opportunities and in the generation of actual credits.

Transparency around these models, he said, will be key to building investor confidence in the market.

“That is really how these carbon marketplaces are estimating the amount of carbon that is sequestered, that can then be sold,” he said. “It’s modeling plus ground-truthing, it’s not pure ground truth.”