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Does carbon sequestration in farming systems add value?

Drawing down carbon and capturing it in the natural ecosystem could potentially earn income for a landowner.  In Australia, approximately 55% of our area or 427 million hectares, excluding timber production, is used for farming and it is this managed resource which farmers could benefit from.  

In the past, natural capital benefits have been unquantified in farming enterprises and as carbon markets start to evolve and look to be more promising from a return on investment perspective. Colliers is starting to see a shift in mindset about the value of clean water, bio-diversity, regenerative agriculture and sustainability in farming systems.  Some landowners are starting to see that by adding a Climate Solutions Fund Program to an existing farming system is environmentally and financially beneficial. 

There are already a number of off-the-shelf programs and pathways that farmers can enquire about. These include storing carbon in soil, planting trees, managing livestock to allow forest to regrow, beef herd improvement or reducing nitrous oxide emissions from irrigated crops, can all generate additional cashflow. However, our clients often ask us “will this add value to my property?”

From a valuation perspective the answer is most probably “yes”. The value impact may not be obvious to analysts considering the value on a simple rate per hectare basis but it will be a standout for those looking at the productive capacity.  

A good example of this could be a grazing enterprise looking to incorporate an Australian Carbon Credit Units Sales Agreement.  Benefits materialise when cattle are managed correctly by not overgrazing pasture, to allow grasses to convert carbon in the atmosphere back into the soil.  Normally grasses will maximise this rate at a certain growth stage. Over time it is possible that the farmer will achieve better pasture mixes, pasture growth and higher stocking rates, which in turn will maximise the earnings from the sales agreement because of the increase in carbon stored in the soil.  

Many will argue that this cannot be done in an extractive enterprise such as dryland cropping. There is also the future possibility that landowners may wish to change the land-use of their property. However, there are always solutions to accommodate this scenario. If you’re a landowner, what is vital to remember is that you can always buy the agreements out if your plans change, the cost of which is far less than total costs to develop land from grazing to dryland farming and terminate the program.

Let me return to the question of “will carbon sequestration in farming systems add value to my property?”. In some pastoral areas of Australia, we have evidence of buyers basing their purchasing decision on the historical carrying capacity of a property. In this case, the property is typically analysed on a Dry Sheep Equivalent (DSE) or Adult Equivalent (AE) basis and then converted to a $/DSE or $/AE rate.
If a farm has a base of 1,000 AE and comparable sales analyse at a rate of $7,500/AE, the value of the property is $7,500,000. If your land has strong historical records, which show that you have increased the long-term AE rate to 1,250 AE because of good pasture selection and grazing techniques  (the result of implementing a Australian Carbon Credit Units Sales Agreement), then the farm value is $9,375,000.  

The key message here is that the value of clean water, bio-diversity, regenerative agriculture and sustainability in farming systems is significant. This is true from both an environmental and a valuation standpoint. We recommend seeking expert advice if you are considering implementing  carbon sequestration in your farming systems.