The Carbon Contract Conundrum

Understand the key considerations before signing up leased land.
Understand the key considerations before signing up leased land.
(Farm Journal)

Key considerations before signing up leased land

As more companies offer to pay farmers for practices that help sequester carbon, contracts offering an extra $5 to $20 per acre look enticing. But the company you sign up with may determine the steps you take on leased farm ground. 

“There obviously are going to be a myriad of legal questions that come up, because the bottom line is a lot of these carbon contracts are lengthy,” says Steve Cubbage, a precision ag consultant and vice president of services for Farmobile. “If you are a farmer leasing land that doesn't have a long-term lease, and you've got a carbon contract for 10 years, you have a problem.”

Obtain Permission

Depending on the company and the state, you may need to make ensure you have authority from the landowner and all stakeholders before signing a contract. 

“If an oil company went to a renter and said give me access and a license to drill, it would never occur to that renter to think they could approve that without talking to the landowner first,” says Aldyen Donnelly, cofounder and director of carbon economics for NORI. “If you're going to get an agreement to give somebody permission to pull carbon out of your land, you need the same permission to get paid to sink carbon back into your land.”

At Nori a legal document proving the land leaser has the authority to sign a carbon contract is required. It must be verified by a third party. Other companies, such as Indigo Ag, require the renting farmer sign a legal document asserting they have control of the land as part of the carbon contract. 

“We don't require growers submit a lease, but we do expect growers’ agreements with landowners include their rights to make long-term operating decisions on the farm,” says Kari Hernandez, global head of carbon operations and offer marketing at Indigo Ag. “Our requirements are that farmers can demonstrate control over the contract period, and we contract for a period of five years.”

It’s important to note that all contracts and obligations differ by company and producers should research and understand the requirements of each product.

Sharing the Carbon Payment

Some landowners may ask to share in the sequestration royalties or have the terms of a carbon contract spelled out in a lease agreement. 

“I can see some landowners wanting this to be a part of the lease,” Cubbage says. “Landowners could require the practices that are necessary for a lot of these carbon credits.”

Those practices often include no-till, cover crops and following a strict nutrient management plan, all which come at a cost. 

Carbon contracts follow the field not the farmer. From the landowner’s perspective, being involved in the carbon process could help ensure the terms of the contract are met. 

“If that grower for some reason doesn't end up farming the ground, and the landowner can contact us to transfer the contract to the new grower, providing for program continuity,” Hernandez says. 

As word gets out, Donnelly anticipates carbon contracts will be part of the leasing conversation.

“You may go to a farm owner and they say the only way they'll give you authority for a carbon contract is if you give them 50% of the revenue,” said Donnelly says. 

How Long?

As mentioned above, contract terms differ by company with lengths ranging anywhere from 5 to 10 years. Cubbage says it’s important to have confidence your lease will last the full contract length if you choose to enroll those acres in a program. Or at least know what happens if the contract ends. 

“If you're moving off of land every year it's probably not going to be very easy to demonstrate control over the contract period,” Hernandez says. “However, if you have been farming ground for 10-15 years that's perfectly acceptable to join our program.”

Documentation Matters

Beyond permission, the biggest hurdle could be collecting the required historical data. 

“The way we generate carbon credits, is based off of management practice information,” Hernandez says. “We require historical data including evidence of how each field was managed.” 

The quality of your data will likely determine your payment rate, Cubbage says. 

“Whether you get $5 or $20 is the difference between the amounts of detail that you have,” he says. “If you're not going to be able to prove it, you're going to be on the low end of the scale while those high-end contracts are going to be reserved for those who do the work.”

As a landowner, keeping this data and documentation may pay off if a sale is ever considered in the future. 

“If you want to sell your land, the guy who has all of his operating data, Excel spreadsheets, records, invoices and evidence available at close, should get paid a higher price for their land than someone with otherwise similar land but isn't transferring the data and the records,” Donnelly says.

Always Future Forward

Carbon contracts and sequestration payments do not focus on past performance. These agreements are focused on the future actions. 

“This is all future forward and that links back to the carbon credit standards of our buyers,” Hernandez says. “None of our current buyers want to pay for something that's already been done.”

“It's something that's being stored in the soil and you're being paid to see progress,” said Cubbage. “They're looking to come back and see how much carbon was sequestered. It takes time and this is not a plant it in the spring and harvest is in the fall type of crop.”

It’s a commitment that regardless of owned or leased land requires dedication from the operator to fulfill in order to see a monetary payout

“For tenant farmers, it's important to understand that your payments are going out into the future,” said Hernandez. “If you don't anticipate having control of that ground, you will also be sacrificing payments if you lose control of it.”

 

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