Policy change, land value and washouts among carbon contract risks

Farmers should seek legal advice and go over any contracts offered to them from companies in the carbon trading space with a fine tooth comb, Mr Whitelaw said at Growing SA on Wednesday.

Carbon contracts are often generational 25 to 35 year deals and bring with them a whole raft of risks he said.

Not least, is the looming prospect of government compliance for a farmer's own emissions - a distinct possibility within the next decade - which would mean enterprises could be better served taking a cautious approach of holding onto any carbon credits, rather than selling to a company looking to offset emissions.

Mr Whitelaw said early agricultural players in the "immature" carbon market risked selling credits at a lower price now than what they may need to pay to buy them back when future compliance forces them to account for their own emissions.

At its most basic level, the carbon trading space involves landholders getting allocated Australian Carbon Credit Units or ACCUs for revegetation or tree planting projects which they can hold or sell to a company wishing to offset greenhouse gas emissions and meet mandated targets.

The carbon space has been seen as a big opportunity by speculators trying to make money, but Mr Whitelaw says it comes with massive risk for sellers.

"The percentage of credits being sold for compliance is actually dropping and there's more and more organisations buying them and holding them in an effort to make money from future pricing," he said.

"That's what we expect to continue to happen."

Currently, Australian farmers do not have to meet emissions targets themselves but Mr Whitelaw says it is likely within a decade akin to farmers in New Zealand so people should be preparing.

"As analysts, we think carbon markets are extremely important and they are going to be necessary for everyone to get involved in in the next ten years - you're probably not going to have a choice," he said.

'We think carbon markets are immature so it's very important you ask the right questions and are aware of all the risks before signing up."

Some contracts set and prescribe how land is to be used for several decades, which could negatively impact land value.

"If your contract is not set up right you can't cancel it because you have a contract with someone for that carbon," Mr Whitelaw.

"At the same time, you might want to put more cattle on that land because you're producing more forage, but your carbon service provider could say no because you're producing more emissions.

"It can also be an issue if you wanted to sell the land as the carbon service provider can have a covenant on that land or force you to pass that contract to the next owner."

Mr Whitelaw said carbon markets also had far more sovereign risk than grain or cattle and while farmers were currently being enticed into carbon markets with a "carrot" approach, it could soon turn to a "stick" approach.

"The majority of the market is dictated by government policy and I think policy change is a big risk," he said.

"There is a voluntary market, but the lion's share of all carbon sold is sold for the purposes of reducing emissions to meet compliance obligations.

"At the moment, it's all the big emitters that have to buy carbon credits but what happens if a government changes and you have to take into account the carbon you're producing?"

Another risk faced by carbon sellers is washouts, similar to what can happen with grain contracts.

"In grain when we talk about washouts, we sell barley for November delivery, we have frosts, we have no barley to sell, the market goes through the roof and we have to pay to replace that," he said.

"That is the same with some carbon contracts in that you could have a carbon sequestering project, but you could in theory have that burnt out and be left needing to go into the market to buy new credits to replace the ones you had been producing."

Mr Whitelaw said farmers should be wary of any approaches from buyers touting easy money from carbon markets with zero risk.

"There is no market in this world that has zero risk."