To Decarbonize Food Production, Washington Must Invest

The passage of the Inflation Reduction Act of 2022 (IRA) signals the acceptance of a technology- and investment-driven approach to the decarbonization of the U.S. economy. But such an approach will be impossible in the agricultural sector—responsible for 11 percent of U.S. emissions—without the kinds of low-carbon innovations that have made improvements possible in electricity generation, transportation, and other sectors. While the IRA includes funding for agricultural conservation programs and the adoption of new technologies, food and farming will remain hard to decarbonize without scaleable technological and practical solutions to high greenhouse gas emitting practices and products.

Many of the most important agricultural technologies were incubated through federal investment in R&D and industrial policy over the past few decades. And Federal and state support for agricultural R&D, although in decline in the United States, remains a key driver of agricultural innovation. Fundamental and applied research is necessary to develop the technologies and practices that will be capable of reducing greenhouse gas emissions and maintaining U.S. agricultural abundance and international competitiveness.

But, research alone is not enough. Achieving environmental breakthroughs in the laboratory does not mean that new technologies can immediately be used in practice. Rather, firms seeking to translate successful research into effective clean technologies at scale often face the dreaded “valley of death,” when a technology is developed but manufacturing processes, sustainable value chains, and a clear path to market remain elusive. Private investment alone often struggles to carry firms over this valley.

The federal government can bridge the gap, though, between research and industrial scale solutions through a set of industrial policy supports, such as public financing through direct loans and loan guarantees. The USDA already does this, to a degree, through a set of loan guarantee programs aimed at rural development and farm ownership and operation. These USDA loan guarantee programs are targeted and effective, but the agency stops short of providing dedicated support for agricultural manufacturing, leaving opportunities to drive progress toward decarbonization on the table.

The USDA must take a more concerted approach to finance publicly and support novel technologies and industries that can make headway towards agricultural decarbonization.

In such an effort, the USDA ought to take heed from the Department of Energy’s Loan Program Office and create an agency, office, or program dedicated to publicly financing emerging agricultural and food technologies that offer critical solutions to decarbonize the U.S. food system, all while improving production.

Key Points Discussed in this Article:

• While the recently passed Inflation Reduction Act of 2022 (IRA) includes funding for agricultural conservation programs and the adoption of new technologies, food and farming remains a hard-to-decarbonize sector due to the lack of industrial-scale technological solutions to high greenhouse gas emitting practices and products.
  
  
• The federal government has had many successes in providing robust public financing for clean technologies in the energy and automotive sectors, but financing for manufacturing low-carbon agricultural technologies and products has been all but non-existent.
  
  
• The USDA ought to take heed from the Department of Energy’s Loan Program Office, and create an agency, office, or program dedicated to publicly financing emerging agricultural and food technologies that offer critical solutions to decarbonize the U.S. food system, all while improving production.
  
  

How do public financing and industrial policy drive innovation?

Over the past several decades, the federal government has effectively become the guarantor of finance capital—bailing out struggling lenders, and de-risking investments in order to drive economic growth. Yet, there is little opportunity for the state to truly direct the flow of capital to industries and technologies that would be beneficial for the public but might not have clear opportunities for short-term profits.

Public financing offers the chance for the federal government to shape markets for the better.

For example, the Department of Energy’s Loan Program Office (LPO) has been touted for its success in supporting the development of clean energy and other low-carbon industries since its creation by the Energy Policy Act of 2005. The LPO has given loans to a number of firms, most recently providing General Motors and LG Energy Solutions with $2.5 billion to construct battery manufacturing facilities in Ohio, Michigan, and Tennessee.

The LPO’s Advanced Technology Vehicles Manufacturing Loan Program— which has mainly focused on providing financing for electric vehicle manufacturing—famously provided Tesla Motors with the capital needed to construct its manufacturing plant in Fremont, California. Public support enabled the company to transition from a niche sports car manufacturer to become the highest value automotive company today.

But the LPO is not without its critics, who point to the likes of Solyndra and Fisker Automotive, two companies that received significant public loans only to ultimately go out of business. The Solyndra fiasco—the firm lied to its private investors and the federal government but still received more than a billion dollars in total financing—produced significant political backlash, politicizing public financing options that were tied to decarbonization efforts.

But failed companies or technologies should not taint the image of public financing, loans, and loan guarantees. In fact, failed publicly-supported companies mean that the federal government is doing its job in supporting firms and technologies that are highly innovative, yet highly risky.

While public financing exists for varying industries through Small Business Administration loans, few sectors benefit from the level of support given to the energy and automotive sectors through DOE LPO. Similar programs across government agencies could build off of existing public financing programs to create jobs, boost economic growth, and decarbonize other key economic sectors. After all, decarbonizing the entire economy will require technological innovation across all industries and sectors.

What aspects of the agricultural value chain are missing from existing USDA loan programs?

The U.S. Department of Agriculture (USDA) offers billions of dollars in loans each year for agricultural producers, small businesses, and rural industries. The USDA’s Farm Service Agency (FSA) and Rural Development (RD) Agency administer USDA’s most popular loan programs aimed at ensuring the economic viability of agricultural production and increasing economic development in rural communities, respectively.

The majority of available USDA loans are administered by FSA in the form of direct and guaranteed loans to help farmers and ranchers obtain commercial credit. With the goal of supporting and sustaining family-sized farms, FSA programs extend farm ownership, operating, emergency, and conservation loans. Depending on the loan type, FSA loans can be used to construct new buildings, promote water and soil conservation, make farm improvements, refinance debt, as well as to purchase land, livestock, and supplies. In fiscal year 2021, over $13 billion in FSA loans were available nationwide.

While FSA is explicitly committed to supporting U.S. farmers and ranchers, financing for other key aspects of the agricultural value chain is limited. Loan programs for manufacturing, processing, infrastructure, and other value chain improvements are scattered across other USDA programs and agencies. These are often not specific to the agriculture sector or are strictly focused on a narrow segment of the agricultural value chain.

USDA’s Rural Development (RD) Agency oversees loan programs to support innovation and rural businesses, some of which can encompass agricultural production. For example, the RD Business & Industry Loan Guarantee Program (B&I) offers lenders guarantees for loans to rural businesses that can be used for business modernization and development or the purchase and development of infrastructure. Congress first established B&I in 2008, with more than two dozen project types eligible for B&I loan guarantees, ranging from nursing homes to renewable energy systems. Only one of these eligible project types—local and regional food enterprise development—is related to agriculture. USDA makes local and regional food enterprise loan guarantees available to projects that process, distribute, aggregate, store, and/or market locally or regionally produced agricultural food products to support community development and farm and ranch income.

Over the last decade, USDA has invested more than $250 million in local and regional food enterprise development. However, this is only a small subset of the approximately $1 billion in B&I loan guarantees provided every fiscal year.

While some agricultural manufacturing or processing firms may be eligible for a slice of B&I financing, the program’s vast scope limits the number of loans available to the agriculture industry. Another limiting factor is the program’s ability to support larger projects. B&I loans cannot exceed $25 million and typically range from $200,000 to $5 million, with an average size of only $3 million. This further limits the ability of the program to strategically accelerate innovation in the agricultural sector.

Amidst the dozens of other RD loan programs beyond B&I, only one explicitly targets the middle of the food supply chain. The Food Supply Chain Guaranteed Loan Program provides loan guarantees for qualified lenders to finance food systems projects, specifically for the start-up or expansion of activities related to the aggregation, processing, manufacturing, storing, transporting, wholesaling, or distribution of food. Approximately one-fifth of the $1 billion in loan guarantees available for fiscal year 2022 is set aside for entities involved in the initial processing of meat and poultry products.

With agriculture contributing 11 percent of total U.S. greenhouse gas emissions, USDA should be thinking about ways to build on its existing loan programs to ensure low-carbon innovations are available at scale.

How can USDA expand public financing to further decarbonize U.S. agriculture?

Increasing public financial support for the commercialization of novel agricultural technologies, inputs, and products will be a necessary step toward decarbonizing the U.S. farm economy, while simultaneously maintaining U.S. trade competitiveness and achieving economic growth.

While existing USDA direct and guaranteed loan programs for on-farm improvements are robust, they are not sufficient to guide U.S. agriculture in the right direction. Similarly, recent support for middle-of-the-supply chain processing facilities, as demonstrated by the Food Supply Chain Guaranteed Loan Program, does not go far enough in building U.S. capacity for a sustainable and abundant food system. These USDA programs lack the capacity to intervene in our food supply and value chains before agricultural production, leaving the dissemination of novel technologies up to risk-averse investors and corporations who are solely responsible for maintaining returns on investment.

This need not be the case. The USDA, like the Department of Energy, has the power to direct financial support to those technologies that are likely crucial for securing a prosperous agricultural system capable of low or zero-carbon food abundance. The USDA can create an entirely new Loan Office, in the image of DOE LPO, or simply expand existing programs to leverage federal investment to build out new technologies and industries.

Such public financial support could dramatically benefit the alternative protein sector, for example, ensuring that the technologies and innovations developed at U.S. laboratories and universities result in manufacturing jobs and economic growth here in the United States. The alternative protein industry has grown by leaps and bounds over the past decade. While plant-based meat producers like Beyond Meats and Impossible Foods currently manufacture their products domestically, cheap labor and debt elsewhere could lure firms abroad. For example, in 2021, Eat Just, a cultivated meat company, announced a financial partnership with the Qatar Investment Authority and the Qatar Free Zones Authority to construct a $200 million production facility in Doha. Outside of Qatar, numerous foreign governments have begun investing in alternative protein production, placing the United States on the back foot in the global race for the future of meat.

In addition to alternative proteins, an expanded USDA loan program for low-carbon manufacturing could support the commercialization and scaling up of beef and dairy cattle feed additives to reduce methane emissions, low-carbon fertilizer, or mass production facilities for precision agriculture equipment to reduce prices for equipment and facilitate farmers transitions to the cleanest forms of mass food production.

The federal government can act quickly to address the lack of public financial support for crucial agricultural technologies and products by taking a cue from the success of DOE LPO. Direct and guaranteed loans for clean technologies have proven to be effective industrial policy strategies, contributing to the development of breakthrough low-carbon technologies and industries over the past decade. It is past time that agricultural technologies are brought into the fold.