- Groundwork
- Market Engagement
- Groundwork
- Market Engagement
How would this project fit in with my current farming business model?
Nature market projects are often just one part of a farmer’s wider business. Some people compare building nature market projects to developing ‘micro businesses’ for the farm. As such, much of the content you see here will be familiar to you.
However, these projects also have key features that separate them from the businesses that farmers usually engage in. For example, the longer timeframes associated and the current uncertainties relating to how nature market projects (and the deals that result) can be blended with government schemes.
Below is a list of questions that will help you think through how to incorporate these projects into your current farm business plan. This includes considerations on building a cashflow or partial budget, but also the less quantifiable factors, such as the potential drawbacks and opportunities to your wider farm that nature markets present.
This milestone contains three subsets of considerations or ‘themes’ that farmers may want to explore at this stage. Click on each of these themes to the right in order to read more.
You can also read case studies of projects that have successfully completed this milestone of development and view a summary of the common activities undertaken at this stage below.
Creating a partial budget / cashflow
Farmers are familiar with partial budgets and cashflows – no business can survive without them. It is always recommended to forecast how the sale of your ecosystem services will stack up financially over the lifetime of the delivery, and then stress-test this forecast for potential changes that might happen over the years.
The below sets out the costs and incomes that farmers can face in nature markets.
Note: this section has been written to try and capture as many types of costs and incomes that farmers might face. However, depending on how you are accessing nature markets and who else is involved, your own cashflow can change significantly.
For example, if you are working with a habitat bank company to sell Biodiversity Net Gain units onwards, then it is common for them to take on the ecological works of creating / restoring the habitat – though this can limit your income choices. On the other hand, if you are forming a seller cooperative with your neighbouring farmers, you’ll likely face administrative and legal fees of setting up a new legal entity (see Milestone 6), but have more control in setting the terms of your income.
You may choose to engage with a financial advisor that has experience in building financial models for nature-based projects. Examples of such advisors are included in the case studies of this Milestone, but you may be able to find recommendations from lawyers, accountants, ecologists and other farmers that are exploring their nature market opportunities.
For simplicity, the types of costs that you might face over the lifetime of the delivery of your project can be split into three separate stages:
- Development costs – before the project gets to a point where it can generate any revenue or attract grants, development costs feed into the design and planning of the project itself.
- Implementation costs – once legal agreements have been signed and a trade or deal is officially confirmed, implementation costs are derived from the upfront costs of your project, such as habitat establishment.
- Ongoing costs – after the habitat is established, there are costs involved that manage the project – such as maintaining the habitat, ongoing legal costs, or community engagement.
Below is a table to demonstrate these costs in further detail.
While costs do not always fit neatly into these different stages, you can ask the below questions to help explore your own cost base:
Development costs
- What sort of ‘project development’ costs have I paid to date?
- How am I valuing my own time spent exploring this project?
- What other costs do I have to pay before the official agreement with the buyer is signed?
- What service providers need to be paid, regardless of whether the agreement goes ahead or not?
Implementation costs
- What administrative or registration fees do I need to pay once the agreement is signed?
- Am I funding any of the ecological works to restore / create the habitat itself?
- Am I paying any success payments to service providers who helped to develop the project, now that the agreement with the buyer is signed?
- How is my income from this project being taxed?
Ongoing costs
- Am I liable for any costs if the habitat fails or needs maintenance?
- What are the costs of monitoring or reporting on how the habitat is performing?
- What foregone income am I / could I be giving up for committing my land for the duration of the project?
- How should I factor in inflation – what is an appropriate inflation rate across the lifetime of the project?
As with costs, income should be mapped across the lifetime of the project (including the timeframe of the underlying legal agreement). Below is a diagram that depicts how income for a nature market deal typically comes from:
- Income from buyers – payments from the beneficiaries for the measurable, robust delivery of the ecosystem service. This can include payments for BNG units, carbon units, or potentially rental payments (where a buyer or third party leases the land to produce ecosystem services). Sometimes buyers are willing to make payments early to meet certain development costs.
- Environmental grants – usually provided by government and philanthropic sources to support environmental outcomes, such as the Environmental Land Management schemes. This can also include Corporate Social Responsibility (CSR) funding from businesses.
- Development grants – like with environmental grants, some government and philanthropic sources offer funds to specifically cover development costs. You can read more about development grants here.
Note: for simplicity, this Toolkit does not consider the use of funds from the farmers themselves, a third-party project developer, or an investor (see Milestone 7) as income, due to the fact that these must all be repaid in some capacity. These can however be considered as potential sources of funding.
Below are some questions that farmers can ask around their income sources:
Income from buyers
- What is the major source of income from buyer(s) that I am reliant on?
- Can I get advanced payment from my buyer(s) to meet certain costs?
- Can I bundle other ecosystem services to increase the price paid?
- Can I stack this income with other buyer payments – such as BNG, agri-environment schemes and nutrient neutrality?
- What are the timings of my payments, and how will that affect my farm’s accounting?
- What tax treatments will I receive on any income from my buyer(s)?
- Do I have a ‘selling strategy’ that allows me to be flexible, such as selling units in the future?
- How can I factor inflation into any future payments from buyers?
- Is there any political or regulatory risk that might jeopardise my income from buyers?
Environmental Grants
- What is the grant(s) paying for, and how much flexibility is there in spending decisions?
- Am I confident that I can ‘blend’ this with my income from buyers – such as meeting additionality requirements of both sources?
- What is the timing of the grant(s) – for example do they meet costs already incurred?
- What reporting requirements come with the grant(s)?
- Do I need to work with other service providers – such as charities – to access the grant(s)?
- What tax treatments will I receive on the grant(s)?
- Can I access further grants based on the social impact of the project?
As you build an understanding of what costs and income that the deal involves, you can stress test your cashflow to see how financially stable it is and how your expected profit might change.
In any cashflow forecasting, you will make several assumptions about how the figures will result in reality. Stress testing involves taking the key assumptions that you think are most likely to change and/or will have the biggest impact on your cashflow. This process is sometimes called sensitivity analysis, or scenario modelling.
For example, you might ask yourself: What if:
- the initial works on the habitat are delayed by a year?
- the market price falls when I plan to sell?
- I cannot secure a certain environmental grant?
- the habitat fails in Year Five?
- the inflation rate goes up?
Depending on who you are working with, you might not be exposed to any of these risks. However, if you are taking on certain liabilities in the project, it is important to know how this will translate to a financial risk for you and your farm business.
As a result, you might consider:
- building in a cost contingency as a percentage of all your costs
- taking out insurance or an indemnity
- building in a cash buffer, or reserving extra land for the deal (a land buffer)
- using upfront investment – such as debt or equity – to close any shortfalls in cashflow (see Milestone 7).
Risks to the wider farm
Farmers are understandably concerned about the potential drawbacks that nature market deals can have on their wider farm businesses. As nature markets are a nascent space, many of these impacts are still being defined and quantified.
Below is a list of potential ramifications relating to how nature market projects affect other parts of farmers’ businesses – such as land values, succession rights, tax planning, and food production.
The fear of adverse tax charges is a well-cited reason for farmers’ reluctance in nature markets.
As well as considering how the deal itself will be taxed – namely through income received – farmers must also bear in mind that some nature market agreements can affect other tax considerations on the farm, namely the use of Agricultural Property Relief (APR) and Business Property Relief (BPR).
For example, if a farmer leases land to a private company that builds a wetland and sells nutrient neutrality credits to a developer, then this would exclude agricultural use of the land and remove the eligibility of APR. Additionally the loss of APR would be compounded by the fact that BPR cannot be claimed, as the lease is an investment and not trading activity.
Conversely, farmers can claim Business Property Relief (BPR) when committing land to nature market projects using the Woodland Carbon Code (WCC) and the Peatland Code). This was announced in April 2023.
Farmers looking for clarity on their own circumstances should seek legal and tax advice.
‘Michelmores: Natural capital assets: taxation drives landowners’ choices’ provides more detail on this issue.
Note: In the March 2024 response to the public consultation on the taxation of environmental land management and ecosystem service markets, HM Treasury announced that agricultural property relief from inheritance tax will be extended from 6 April 2025 to land managed under an environmental agreement with, or on behalf of, the UK government, Devolved Administrations, public bodies, local authorities, or approved responsible bodies. APR will be available where there is an agreement in place for the environmental land management scheme on or after 6 March 2024. This includes an agreement entered into before 6 March 2024 if it remains in place on or after 6 March 2024. The government will also consider extending APR to accredited codes and schemes following the release of the British Standards Institute’s Nature Investment Standards.
Though the government has expressed its broad support for nature markets and their alignment with agri-environment schemes (see Public Sector Funding and Policy), it is currently unclear how most schemes, such as the Environmental Land Management schemes (ELMs), can be ‘blended’ with nature market deals.
The Landscape Recovery pilots – one of the new ELMs – are seeking to clarify the roles of ELMs with private finance, and the current government advice is that farmers will be supported to develop credible proposals for attracting private finance. For example, they will be able to use the Landscape Recovery grant to help them develop land management plans and create business models.
It is likely, given government commitments globally to reduce climate change and halt biodiversity loss, that farmers will be required through their supply chains to deliver on environmental outcomes in the future. This direction of travel is covered in more detail in Public Sector Funding and Policy. Farmers should engage with their supply chain to understand what they may be expected to deliver down the line.
This is important to know because farmers may be required by their supply chains to be net zero in the future – and if farmers have sold carbon credits beyond their own on-farm emissions, farmers may be not meet net zero requirements. It is therefore recommended that you only sell credits above what it would take to offset your own emissions.
For example, some supermarkets are asking its farmers to sign up to sustainability commitments, such as carbon neutrality, where this would limit the amount of carbon a farmer can sell to another organisation. In the case where a farmer has signed all their available land to a separate carbon scheme and then face such requirements, they may be in a position where they have to acquire more land to stay in agreement with their agricultural buyer.
Once farmers retire or pass away, they may be leaving their successors with an obligation to maintain the terms of the nature market deal, if still within the timeframe.
It is important to consider how this fits in with your succession planning, for example what funds you are leaving to help maintain the habitat, and how the project fits in with the objectives of the future landowner.
It is not yet clear how developing nature market projects on farmland will affect land prices.
As these markets develop, there may be an increase in the demand for land. For example, with the roll out of Biodiversity Net Gain (BNG), Defra estimates that 1,300 hectares of habitat would be required annually to meet property developers’ offsite needs. Land with a healthier stock of natural capital – such as soil carbon – can also improve land values.
However, putting said land into a nature market project often legally restricts the use of that land over the length of the underlying agreement, and therefore the nominal value of the land.
If you want to retain the option of selling or leveraging the land you’re using during the course of the agreement, it is a good idea to speak to a legal advisor and potentially a land valuer on what impacts the nature markets project (and the underlying legal agreement) might have on the land values of the land and any linked sites.
The tenancy and ownership structure of land can have significant implications for farmers engaging in nature markets in the UK. The rights of tenants in relation to nature markets are still not entirely clear in the UK and can pose additional barriers.
Further considerations are provided in the Tenancy & Ownership section of the Toolkit.
When designing a project, farmers may already have plans for the land they are using when the length of the project is finished (typically between 30-120 years). They might have the option to return this land to agricultural production, or use it to qualify for certain agri-environment schemes (see below).
However, these options are limited if the habitat itself is difficult to alter or reverse. For example, if a farmer wants to convert a wetland they previously installed for nutrient neutrality credit sales – they may find the costs of putting it back into agricultural production are prohibitive.
It is also worth noting that after the underling agreement ends, the habitat will fall under the planning and land classification rules of that time, which can also put a legal restriction on how the habitats are used once the agreement is finished.
Farmers with land near public access routes or residential areas can encounter members of the public walking or cycling through their farm, at times in areas where they are not permitted.
If a farmer is committing a site to a nature market deal that is visited by the members of the public, they may consider how this will impact public access and the potential for damage to the newly established habitat on that site, or even other parts of the farm. For example, if fencing is put up around a newly planted woodland on a site that is regularly used by pedestrians, this may inadvertently lead to them diverting to other parts of the farm and posing an inconvenience – or even damage to the land.
Opportunities for the wider farm
As with potential drawbacks, there are also opportunities that nature market deals could offer to the wider farm. Below is a list of the most commonly referenced opportunities that farmers consider:
Arguably the most often cited advantage of engaging in nature markets is the opportunity they provide to diversify wider farm business, enabling farmers to become less reliant on other income streams.
This is particularly true if the farmer is using marginal or less productive land in the project.
Nature market deals and trades fundamentally rely on an improvement in natural capital, whether this is improved peatlands, woodlands, waterways, farm soil or other types of natural capital.
In the UK and across the globe, the impacts of improved natural capital on a farm’s overall profitability are being studied.
Many farmers in the UK, including those featured in the case studies of this Toolkit, believe that higher quality natural capital on a farm can make the land more resilient to climate events and other stressors. For example, improved soil health makes crops and pasture more resilient to drought.
In some cases, improved natural capital can also allow farmers to decrease costs by using inputs more efficiently, increase income (from the trade itself) and increase the long-term value of the land.
Below are some resources where you can read more about this line of thinking:
- Natural capital: a farmers’ perspective, Food, Farming and Countryside Commission
- Nature Means Business, Nature Friendly Farming Network
- Farming with Nature, NatureScot
Depending on the particulars of your project, there may be opportunities to start community, educational and scientific activities that relate to the site(s) themselves. This can be an opportunity for farmers to strengthen or build new relationships with stakeholders that are not directly involved in the project itself, but result in mutual benefits.
For example, farmers can:
- partner with local universities or research institutes on relevant ecological practices, such as the effects of a restored / created wetland on the wider hydrology of the farm.
- Include community members in the informal monitoring of the site(s), such as citizen science or educational days organised with local schools.
- create income streams that complement the nature restoration / creation aspects of the deal – such as eco-tourism opportunities and sales of regeneratively grown produce from the sites.
Such activities should be checked with the main stakeholders of your deal – including the buyers – to make sure these do not breach the agreement you have.
However, anecdotally it is said that farmers who can also deliver wider social benefits, such as the ones listed above, are looked upon more favourably by buyers and other core stakeholders in the deal.
As the term of the nature market deal draws to a close, you may ask yourself what the options are for managing or converting the habitat.
Though this cannot be confirmed now, most believe that with the direction of public funding and support, farmers will be able to put their habitats into environmental schemes that reward the maintenance of high quality habitats – such as the Higher Countryside Stewardship – without the cost of restoration or creation that was previously met by the terms of the nature market deal.
