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Closing the gap: An analysis of the costs and incentives for regenerative agriculture in Europe

As climate change increasingly threatens agricultural supply chain stability, regenerative agriculture offers a solution, boosting profitability within 3–5 years while safeguarding natural resources. However, upfront costs (€2000–5000/ha) and funding gaps remain key obstacles

Our current agricultural supply chains are at risk with climate change and intensive agricultural practices leading to more volatile and decreasing agricultural yields globally. This will not only affect the agricultural sector but will also impact economic systems and governments. Implementing regenerative agriculture practices is part of the solution as it contributes to more resource efficient agricultural production that can protect and restore soil, biodiversity, water and reduce carbon.

Members of One Planet Business for Biodiversity (OP2B), including Unilever and PepsiCo, have put forward ambitious targets to implement regenerative agriculture principles and practices across Europe and beyond. Deloitte has supported various agricultural players in implementing regenerative agriculture strategies. They have identified the lack of a viable economic model for the adoption of regenerative agriculture practices, and more specifically the gap in incentives available, as a major bottleneck to scaling the implementation of regenerative agriculture practices in Europe.

This report investigates the economic impact of implementing regenerative agriculture practices at farm level, catalogues available incentives, and articulates the financing gap which farmers face when transitioning. Scope wise, six regenerative agriculture practices and 34 crop-country combinations, based on 10 different countries and 12 different crops are considered. The report also provides guidance and concrete recommendations for all actors, including value chain players, farmer associations, regenerative agriculture implementors, input and equipment providers, financial institutions and government institutions, to collaborate and help farmers improve the business case by supplying additional as well as fit-for-purpose funding. The incentives represented in this study are by no means exhaustive, as there were issues related to transparency and competitiveness when collecting data on private incentives, and many public schemes are yet to be defined. This challenge of limited data availability and transparency of incentives has also been noticed by the farmers and other value chain experts, and is one of the takeaways of this investigation as well.

Executive Summary

Our findings on the farmer business case are based on a quantitative model for costs, yield impact and investments associated with implementing regenerative agriculture practices for 34 unique country-crop combinations versus conventional practices, based on expert interviews with farmers, regenerative agriculture implementers and advisors. The findings on incentives are based on collecting available public and private incentives, based on direct approach to incentives providers and supplemented with desk research. Our main findings include:

Farmer business case and funding needs

  • Based on the cases we reviewed, we found that the farmer business case (Net Profit Impact) for implementing the six most common regenerative agriculture practices is positive after 3 to 5 years for all farm sizes versus conventional practices (for the crops in scope of this study). The main drivers of higher profitability are projected yield increases and reduction of costs.
  • We encountered differences in profitability which can mostly be explained by crop types, rotation schemes, farm sizes, and stage of transition to regenerative agriculture practices. Profitability is higher for high yield density crops (such as potato, tomato), for crop rotations and for large farms (>55ha). For similar crops grown across countries, variation in profitability is mainly due to differences in average farm sizes, but is also influenced by yield, crop prices and input costs. 
  • Especially small and medium-sized farms can only reach a positive business case by taking prudent investment decisions (e.g., equipment sharing or use of agricultural services to limit investments in equipment) and alternating with more profitable crops in rotations. These farmers need support to manage the transition profitably.
  • Irrespective of the Net Profit Impact, farmers are confronted with significant investments before implementing regenerative agriculture practices. According to our research, upfront investments range from ~€2000/ha to ~5000/ha (pre-incentives) depending on the farmer’s decisions to buy or share required equipment or use agricultural services. When these upfront investments are accounted for, payback period for farmers is approximately 9 years, with a ~4% 10- year IRR (p.a.) only, even with investments on the low end of the range

 

Incentives

  • When looking at the available incentives our study uncovered, we can conclude that there are not sufficient incentives available to cover the costs of the transition at farm level: By applying available incentives, the payback time can decrease from 9 years to 5 years. However, farmers will still have a funding need between ~1400 to 4100 €/ha (post-incentives) depending on the extent of investments made.
  • Also at a macro-level, there is a significant funding gap with only ~2 to 6% of total funding needs for a transition to regenerative agriculture practices in arable farming in Europe currently being covered. We however encountered differences in incentives identified between the countries in scope with a greater number of incentives identified in countries such as UK, Germany and France, and fewer incentives for regenerative agriculture identified in Serbia, Greece, Turkey and Poland.
  • Moreover, we found that current incentives are not fit-for purpose: they focus mainly on supporting ongoing costs rather than on the much-needed funding for upfront investments, and they are often not built around specific farmer needs and desired outcomes of the regenerative agriculture practices, leading to undesired consequences such as mono cropping.
  • Finally, we have also observed a lack of transparency of and access to incentives as well as a lack of accountability to monitor and steer the incentive landscape for implementing regenerative agriculture practices across Europe. 

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