In the past 65 years, climate change has reduced global agricultural productivity by more than 20%, and soil degradation could reduce global crop yields by as much as 10% by 2050 if current practices continue. The transition to regenerative agriculture is essential for climate resilience, soil health, and long-term productivity. However, for farmers the shift comes with significant short-term financial pressures such as higher input costs and temporary yield declines which leave them more exposed to the impacts of climate variability. 

Existing research estimates that farmers can face an income dip while transitioning to regenerative practices. For example, a 2025 study by Regen10 and PELUM Kenya estimates a ~10-12% net income reduction for farmers in Kenya in year 1 of the transition and cumulative net income losses of ~5-6% over the first 4 years of the transition.¹ Without tailored financial support, these costs are often prohibitive. 

This raises a critical question: can transition support make the adoption of regenerative practices more viable for farmers, while remaining scalable for funders? 

This article makes the case that a combination of financial instruments such as concessional loans, revenue guarantees, and insurance can redistribute risk and cost across actors, and identifies pathways to reduce the overall cost of supporting the transition. 

Transition finance is fundamentally about managing multiple risks 

In the early years of transition, farmers often experience lower yields as soils adjust and new practices take hold. At the same time, they may face higher input or labor costs as they adopt unfamiliar techniques or purchase bio-inputs that do not benefit from the same subsidy packages as conventional fertilizers. Overlaying this is the risk of climate shocks such as droughts or erratic rainfall which can further reduce income, especially for transitioning farmers who often lack buffer stocks or other means of recovery. Over time, incomes tend to rise above pre-transition levels thanks to a combination of more robust demand and market linkages, price premiums, and improved yields. For example, a state-wide agroecology program aiming to cover 6 million farmers in Andhra Pradesh in India that began in 2004 led to increased crop diversity and higher yields of certain crops. In Brazil, a beef farm that transitioned to sustainable agricultural practices saw its income increase by 130% from 2015 to 2018.  

The easiest way to support farmers is to provide grants to make up for temporary income gaps; it is also the most expensive pathway. In the Kenya example, this cost would be USD 570 per hectare for every farmer supported. In our work building a regenerative and agroecological transition roadmap for Murang’a county, our calculations estimated that this income support could account for up to 60% of the total transition cost.  

There are other ways to reduce risks and the income dip for farmers. As the risks vary, the approaches need to be tailored.  Some are predictable but temporary, such as yield dips during transition, while others are harder to anticipate, such as extreme weather events. Higher input and labor costs increase the upfront financial burden on farmers, even where the longer-term economics of transition may be positive. Therefore, transition finance goes beyond providing capital to understanding pricing and managing different types of risk effectively. Thus, building robust risk models, MRV systems, and data infrastructure is foundational to scaling transition finance. 

De-risking mechanisms can significantly reduce the cost of supporting the transition 

Our analysis shows that risk-sharing instruments can achieve similar levels of farmer protection at a much lower total financing cost of approximately USD 230 to USD 380 per hectare by redistributing risk across farmers, funders and insurers. This is at least 30% lower than the cost of a full grant compensation for lost income.  

Among the instruments analyzed, revenue guarantees deliver the largest reduction in farmer income risk, per dollar of support. By ensuring that farmers receive a minimum level of income even if yields fall or prices fluctuate, they provide comprehensive income stabilization during the transition period. 

However, this efficiency comes with trade-offs. If many farmers experience losses at the same time due to a widespread drought, for example, funders may need to cover large simultaneous payouts. In addition, implementing revenue guarantees at scale requires reliable data on yields and incomes as well as systems to verify losses, which adds another layer of complexity. 

Tools like concessional loans and insurance can lower costs but only cover part of the problem 

Concessional loans offer one way to address the higher upfront costs that farmers face during the transition, especially for inputs and working capital. However, their impact on the overall cost of transition is limited. For example, a 5% reduction in interest rates lowers the financing costs of farmers by only around USD 10 per hectare. Therefore, concessional loans can ease short-term liquidity pressure, but because the capital still needs to be repaid in full, they do not solve the underlying problem of transition-related income loss. 

Climate insurance offers another approach by covering extreme weather-related losses. In the scenario where climate insurance is the only support instrument provided to the farmer, funder costs remain relatively contained, increasing from approximately USD 100 per hectare to USD 200 per hectare as climate risk rises, with an additional cost to farmer accounting for ~USD 30 per hectare. 

However, from a farmer’s perspective, insurance only solves part of the problem. It does not address more common challenges such as transition-related yield declines, changes in farming practices, and day-to-day income volatility. As a result, insurance works best as one part of a broader solution rather than a standalone instrument.  Combining it with other tools can improve outcomes. 

Optimizing the mix of instruments enables scalable transition finance 

At first glance, the cost of transition can seem prohibitive. But our analysis shows that the more important question is about which risks are being covered and by whom. Different tools solve different problems. Revenue guarantees are most effective for protecting farmers from temporary income dips during the transition period. Insurance is better suited to covering extreme climate shocks. Concessional loans or input financing can help farmers manage higher upfront costs, but because they still need to be repaid, they mainly ease liquidity constraints rather than lower the total financial burden of transition. 

No single instrument can solve the problem, but when combined effectively, funder costs could fall from ~USD 570 per hectare to USD 230-380 per hectare (a ~30% to 60% reduction), while keeping the cost to farmers within an affordable range. Innovative financing mechanisms can therefore significantly reduce the cost of transition to regenerative agriculture, when compared with grants as the sole support. The most effective approaches balance risks across farmers, funders, and insurers, and match each tool to the type of challenge it is best suited to address. 

When it comes to implementation, this model needs to be refined for specific local contexts; the right mix of instruments needs to be based on the strength of delivery systems and the quality of data required. If this can be done well, transition finance can make regenerative agriculture more affordable for farmers and scalable for development partners. 

1. ^{1. Based on the report ‘Regen10 – Landscape Transitions Pathways, Kenya,’ farmers could forgo USD 570 per hectare of cumulative profits in years 1-4 but this is offset by expected additional profits of ~USD 1,100 per hectare in years 5-10, leading to a net gain of ~USD 600 per hectare over a 10-year period.}  ↩︎