Why Should Food and Agricultural Business-Related Companies Pay for Outcomes? (vs. Pay for Practices)

Pay for Outcomes: A transaction model in which farmers are compensated based on the volume of environmental improvements produced each year. In turn, beneficiary customers purchase verified and aggregated environmental outcomes produced on farms.  

Pay for Practice: A transaction model in which farmers are compensated for implementing conservation practices such as reduced tillage and cover crops. Supporters often fund efforts by allocating a flat rate or set dollar amounts per acre or per project. Depending on the program, outcomes may or may not be quantified. 

Communities, consumers, and investors are asking for (and often demanding) clean abundant water and healthy and sustainable food production systems. In today’s data-intensive and disclosure-rich world, the viability of modern food and agricultural business models increasingly depends on meeting these needs with measurable and verified results.  

The “pay for outcomes/pay for performance” approach allows companies to demonstrate their commitment with several distinct advantages when compared to “pay for practice”. These advantages include:  

Cost Efficacy

Paying for outcomes that represent tangible and verified carbon/greenhouse gas (GHG) reductions or water quality benefits ensures funding is prioritized for practices and other factors that achieve the desired objectives of the organization and that meet specific reporting criteria, such as Net Zero, GHG Protocol, Science Based Targets, UN Sustainable Development Goals, and the Task Force on Climate-Related Financial Disclosures (TCFD). Because GHG emission reduction or carbon sequestration outcomes can vary significantly from field to field and practice to practice, paying a flat rate for a conservation practice risks misallocation of funds to projects or interventions that do not generate outcomes that meet these criteria, or that generate outcomes that are not as cost-effective as those generated by alternative practices.  

Risk Management

The Soil and Water Outcomes Fund sells verified outcomes (GHG reductions and water quality benefits) at a fixed price and bears the financial risk if outcomes are not realized. This allows food and agricultural companies to continue to do what they do best, servicing their customers and managing their business, without investing in the overhead needed to manage environmental performance risk or manage price risk related to GHG offset markets. SWOF uses investor capital combined with a stack of tools, technologies, a reversal buffer pool, and a boots-on-the-ground farmer-first approach, to pay for, quantify, verify, and monitor the performance of the outcomes generated with operators and landowners in the program.  

Stacking & Cost Sharing

Many on-farm conservation practices create multiple important and valuable environmental benefits beyond GHG emission reductions and carbon sequestration. For example, cover crops and no till often lead to reductions in nitrogen and/or phosphorus. In many cases, these outcomes can be monetized, “stacked,” and sold to complimentary beneficiaries that derive value from them, including municipal wastewater utilities, state departments of agriculture, or even USDA-NRCS. An outcomes-based program also enables entities at different stages in the supply chain to participate in the same transaction as PepsiCo and Ingredion have in Illinois. Stacking outcomes and supply chain partners in the same transaction subsidizes the costs of each individual outcome while simultaneously generating larger revenue opportunities for the farmer. Farmers enrolled in the Soil and Water Outcomes Fund program in 2020 received on average $35/acre.  

Data

Consistent, reliable, and measurable data that can undergo scrutiny and interrogation is a critical requirement of purchasing an outcome. Paying for an outcome requires that the outcome has been or can be quantified. The Soil and Water Outcomes Fund collects, quantifies, generates, and maintains the data required to prove efficacy of the underlying practices in achieving desired environmental outcomes, particularly the potential of agricultural soils to sequester carbon. 

To learn more about the pay for outcomes approach, please contact us.