CPG companies are facing challenges on multiple fronts: tariffs that impact both supply chains and markets; the rise of GLP-1s and the demonization of highly processed food; newly urgent climate threats and biodiversity loss that could upend supply chains within decades; and shifting federal guidance on food consumption, driven by the MAHA movement.
Meanwhile, many CPGs are committed to ambitious ESG goals that involve reducing greenhouse gas emissions and improving environmental impact. A year ago, meeting those goals seemed straightforward: federal funding for sustainable farming practices (via programs like Partnerships for Climate-Smart Commodities, or PCSC) meant CPGs could partner with farmers benefitting from federal dollars.
But with the revamping of PCSC into AMP, among other changes, it’s clear that more of the impetus for regenerative farming has to come from the private sector. This means CPGs must find ways to change the behavior of the farmers they partner with.
That’s something we’ve been figuring out how to do for years now. In this piece, we’ll explore three ways CPGs can inspire the adoption of regenerative practices among their grower partners to meet ESG targets and benefit the planet as a whole.
1. Pay for Practice or Pay for Outcomes to Incentivize Regen Ag
In recent years, CPGs that want to reduce their Scope 3 emissions (i.e., emissions from their supply chain) have found success by offering upfront rewards to farmers who adopt regenerative practices.
These practices can do things like reduce nitrogen and increase carbon capture, which translate to lower Scope 3 emissions. Offering cash payments (either upfront, for carrying out a certain practice, or after harvest, based on impact) is one way to reward farmers for taking on the risk associated with adopting new on-farm practices.
As the landscape of available funding changes, however, CPGs may have to rethink how they talk about pay-for-practice and pay-for-performance agreements if they want to continue accessing federal funding.
One potential option: align sustainable farming practices with the MAHA priority of creating more “nutrient-dense” foods (rather than the Biden Administration priority of reducing greenhouse gases).
Luckily, food becomes more nutrient dense when there is more biomass available in the soil, which is also something that helps increase carbon sequestration and reduce the emission of greenhouse gases.
The benefit of shifting language toward nutrient density is that, while the target outcomes may be slightly different, the practices required to get there are the same. This means CPGs can likely continue current programs (perhaps with changed incentive language) and, should federal programs and incentives shift back toward reducing greenhouse gases, CPGs will remain well positioned.
Another option for CPGs to consider: yield warranties.
2. Offer Warranties Tied to Sustainable Inputs and Practices
The pay-for-practice model discussed above succeeds in part because it enables risk sharing: by providing additional cash upfront, CPGs shoulder some of the economic burden farmers face with the new tools or inputs required to make a practice change. With pay for practice, CPGs make it easier for farmers to try something new.
Another way to help farmers try something new is to use a yield warranty to minimize the downside risk associated with trying new farming practices. Our Crop Plan Warranty is one such product. Here’s how it works:
- A retailer, manufacturer, or CPG invests in the warranty product and attaches it to specific crop inputs or farming practices.
- Farmers who use those inputs and / or practices know that, should their crop underperform (as defined by the specifics of the warranty agreement), they will receive cash compensation.
- Farmers plant, harvest, and sell as usual. They collect warranty payments only in the event of underperformance.
The warranty is an established financial product that aligns the incentives of CPGs with those of farmers: CPGs want to reduce GHGs, increase nutrient density of crops, and ensure resilient supply sheds, and farmers want less upfront risk associated with trying practices that benefit their yields and resilience in the long term. Everybody wins.
In one pilot project we ran with The Nature Conservancy, 75 percent of the farmers who adopted the nitrogen reduction regimen said they wouldn’t have done it without the warranty.
Warranties can be powerful, especially when they’re not used in a vacuum. For example, in that pilot project, we brought in agronomists to offer technical support to farmers as they used the new products and practices. Access to this expertise was key in driving adoption.
Warranties are a great tool in part because they’re incredibly flexible: CPGs can customize them to incentivize various products and practices, depending on their goals and targets.
3. Co-Invest Creatively with Ecosystem Partners
Both “carrots” (like upfront incentives) and easing the sting of “sticks” (via warranties that reduce downside risk) are effective strategies to drive adoption for individual farmers.
But we’ll get the biggest benefits from regenerative agriculture when it’s done at scale. Given that reality, more groups are forming to not only incentivize mass adoption but also fund it long term. Increasingly, we’re seeing coordinated financial action to support the transition to more climate-friendly farming practices on a larger time scale.
For example, the Rockefeller Foundation recently announced a joint effort to finance the transition to regenerative agriculture in the Midwest.
Similarly, the Agriculture Finance Sustainability Coalition has brought together several organizations (including Growers Edge) to “accelerate financing of agriculture solutions to combat the climate crisis.”
Those solutions might include anything from simplified farmland mortgages to larger investments in agricultural infrastructure that benefit entire regions. CPGs that want access to sustainably harvested inputs can consider engaging with these groups to help shape the future of regenerative agriculture with longer-term co-investment.
Another promising trend is the rise of alternative lending approaches to fund regenerative agriculture and the transition to organic farming.
The terms of traditional farm loans often don’t suit non-conventional operations (for example, the transition to becoming a certified organic farm typically takes three years), which means farmers interested in embracing more sustainable practices often don’t have the funds to do so.
But alternative finance partners are introducing new financial products, from “patient capital” (which seeks returns over a decade or more versus a single year) to loans structured specifically for the transition to organic farming to loans that reward environmental stewardship.
Again, partnerships that incorporate longer-term co-investments may be an opportunity for CPGs to fuel production of the sustainable crops they need to reach ESG goals.
Additional Consideration: How 45Z Might Impact Outcomes
One final consideration for CPGs exploring their options for spurring increased regenerative farming: the 45Z tax credit, introduced by the One Big Beautiful Bill Act.
As of now, we know that 45Z (a tax credit for sustainable fuel producers) seems to be on track. What we don’t know is which tracking system (mass balance vs. book and claim) or which carbon intensity (CI) calculator methodologies (GREET vs. USDA) will be used.
If the book-and-claim system is chosen, it’s possible that the low-CI grain prices will be bid up. CPGs, food companies, and other non-feedstock grain buyers should keep close tabs on 45Z developments to ensure the premiums they’re paying for sustainable grains remain competitive and let them meet sourcing goals and budgets.
Innovation and Collaboration Can Drive Behavior Change & Better Climate Outcomes
Economic support for climate goals may not be a priority for the current administration in Washington, but those goals remain urgent for the future of food security and CPG supply chains.
Luckily, innovative startups, finance organizations, and nonprofits are working hard to identify products, practices, and incentive models that can help CPGs meet ESG targets while also expanding regenerative agriculture practices more broadly.
By partnering strategically, CPGs and other food companies can deploy purpose-built financial tools to drive adoption of sustainable farming, create a framework for a new way forward, and preserve US food security in the process.