Agriculture and sustainability: Stewarding long-term assets

Agricultural land, or ag-land, is a unique asset. “It’s not a commodity — it’s more like a living organism,” says Steven Orchard, a trust real estate advisory specialist with Wells Fargo Wealth & Investment Management.

When that investment spans generations, owners may have a greater focus on its value and duration. Sustainable practices can play a key role in the viability of long-term assets, but there is no silver bullet to implementing them.

So, what do landowners need to keep in mind to help optimize investments in their land? Orchard and his colleague Colby Winzer, who is a senior trust real estate advisory specialist at Wells Fargo Wealth & Investment Management, offer guidance based on their experience.

Consider your mindset as you move forward

Start by making a conscious choice: “Mine or cultivate,” Orchard says.

Mining means extracting from the land — literally or metaphorically. Farming can be a very efficient way to take value from natural resources: growing things generates cash flow. But used to exhaustion, the land eventually loses its ability to support life. In that way, mining farmland is a terminal enterprise.

Cultivating means sustaining and improving the living health of agricultural land. “It’s not environmentalism, it’s economics,” Orchard says. “Sustainability keeps the land healthy and productive, so that the asset has perpetual, generational value, increasing short- and long-term cash flow.”

Those who choose to cultivate may encounter cash flow and process challenges. Orchard and Winzer’s advice: Take small steps and integrate sustainable practices over time to manage risk and contain impacts. And understand that where to begin depends on the land itself and the challenges you face. “Every asset is different,” Orchard says. “Sustainability is not a push-button decision.”

Think in terms of revenue streams

Ag-landowners may face concerns about keeping larger holdings together, especially when the rising generation inherits. “Exploring solar, wind, and carbon credit initiatives may help to keep larger pieces of land intact by providing new revenue streams for current and future generations,” says Winzer. “When planned well, these initiatives can align with land stewardship, ownership, and sustainable farm practices.”

Winzer also points out that some revenue-producing “sustainable energy” projects can offer double bottom-line benefits. A solar project, for example, would preclude cropping, but still support grazing sheep, which could allow overworked soil time to rebuild productivity. Wind, meanwhile, is always additive: “You can farm around it,” Winzer says. “In my view, the potential revenue stream from wind can turn a piece of farmland into an investment that rivals any in your portfolio.”

Potential revenue streams aren’t limited to wind and solar. There is a rapidly developing market among corporations looking to reduce their carbon footprint. One option is to buy carbon credits from farmers who have implemented carbon sequestration, a farm practice that pulls carbon out of the air and embeds it in the soil via plant roots and microbiology. The potential impact in the US is compelling: approximately 250 million tons of carbon dioxide, or 4% of US emissions, could be sequestered annually, according to a 2019 report by the National Academy of Sciences.

Sustainable agriculture has value to the family beyond money. Securing such revenue streams to the land encourages future generations to retain the property, especially when the rising gen has an affinity for the environment. “Families reach their economic goals,” Winzer says, “as well as their conservation and sustainability goals while sharing values as a family.”

Consider the benefits of tax reduction

Many ag owners also consider conservation easements. These agreements between landowners and nonprofit land trusts or government agencies limit the ways in which that parcel of land can be used in exchange for incentives for the landowner (typically either a lump-sum payment or a tax benefit). In some cases, conservation easements set aside land so it can be perpetually farmed but can’t be developed for commercial uses.

Generally speaking, a landowner who enters into a conservation easement agreement can see sizeable deductions in income taxes for up to 15 years, depending on the amount of land, its value, and the landowners’ income.

“You need to find the right partner if you go down this path,” Winzer says. Land trust partners like the various Ag Land Trusts nationally have a specific mission of keeping agricultural lands working. If any environmental resource needs protection, there is likely a land trust organized to offer appropriate conservation solutions.”

Land placed under a conservation program can be sold or passed on to heirs, but the burden of the easement remains attached. “There are important additional tax and estate planning considerations involved,” Winzer says. “A conservation easement can help your heirs’ overall estate tax exposure.”

If you’re interested in learning more, Winzer recommends consulting a tax professional or attorney for input and guidance for your particular situation, as well as assistance seeking the government agency or nonprofit partner you’d work with.

Reach out for help

Sustainably managing agricultural lands so they are viable assets for future generations can be challenging. Talk to your advisors at Wells Fargo Wealth & Investment Management to learn more and get connected to specialists who focus on sustainability. “Every day, our teams talk to leaders in the field,” Orchard says. “The scale of the portfolios we manage give us experience with the development of sustainability, and we are ready to help.”