Google+

Valuing Natural Capital On Agricultural Lands: Healthy Soils Project (5 Use Cases)

Growing More Than Food And Fiber

Farmers are compensated for producing commodity crops but not for producing clean air, water, healthy food, soil, a stable climate or wildlife (collectively, natural capital and ecosystem services). Yet producing these essential goods and services and managing resources wisely is as valuable as the production of the commodity crops.

Excluding natural capital from the financial system distorts market processes producing serious environmental and social problems. Since agriculture is the dominant human land use encompassing 50% of the land area of the entire planet, the negative effects of poor farming practices are truly immense.

  • Agriculture is responsible for 70% of all fresh water consumption;
  • Agriculture produces 80% of all pollution released to waterways and oceans;
  • Agriculture has released more carbon than all the oil burned to date;
  • Agriculture is the most impactful human activity to wildlife populations, genetic diversity and degradation of natural infrastructure.

The IVE Soil Product

The IVE soil product is a financial tool that creates a financial asset and income stream for farmers when they “grow” natural capital. Where the commodities futures market allowed farmers to receive unrealized and uncertain future income to invest in the next harvest. The IVE Soil Product allows farmers to be compensated for producing the natural infrastructure and the ecosystem services vital to society.

By making a market in natural capital, investors can profit from the initial pricing of natural assets and from the increase in the value of these assets and the goods and services they produce. This initial pricing can be likened to a company going public or the privatization of neglected public assets in the former Eastern Block countries in the 1990’s. The increase or decrease in natural capital on the enrolled lands drives the price of the security higher or lower. This is analogous to an increase or decrease in a company’s revenue or earnings.

Monetizing Natural Assets — A Huge Opportunity

The value of global natural capital has been estimated to be valued at over $4,000 trillion, producing $142 trillion of ecosystem goods and services per year, almost double total world GDP, and yet essentially none of this has been monetized. On agricultural lands, the ecosystem service values ranges from $1,000 per acre/year to as much as $25,000 per acre per/year depending on the land cover-type, (e.g., row crop, forest, grassland, or wetland) and farming practices such as organic vs. conventional. Given that there are 18 billion acres of agricultural land on the planet, over 1 billion in the U.S. alone, the potential for monetized natural capital is massive.

Agricultural Sector — An Attractive Market For IVE

  • Agriculture is at the intersection of energy, water, human health and the environment;
  • The agriculture sector is primed for financial innovation;
  • The entire supply chain, growers, distributors, processors and retailers are struggling to find a way to meet demand for sustainable products and ameliorate expensive regulation and supply chain mandates;
  • The legal structure of land ownership makes it easy for a finical instrument to value natural capital on agricultural lands, including assets held in public trust.

Initial Product Use Cases:

  • Conversion of conventional to organic or better production;
  • Restoration of highly degraded and abandoned land;
  • Conversion of corn/soybean monoculture to grassland grazing for animal protein production;
  • Specialty crop product for orchards, vineyards, etc.;
  • Forest lands, reforestation and existing forest acres.

Positive Market Drivers

Market Demand for Healthier, Sustainable Products: The market is already signaling the opportunity and need for financial innovation. Demand for organic or better products greatly outstrips supply. Demand is increasing at 20%-25% a year and supply at only 7%. By valuing natural productivity, the IVE product can greatly accelerate the implementation of sustainable practices.

Supply Chain Participants Are Activating to Overcome Market Deficiencies: Companies like Whole Foods, Nature’s Path, Chipotle Mexican Grill, Pacific Foods, and Clif Bar are extending into the supply chain to address the sustainable supply/demand imbalance. They are financing farmers directly, offering technical training and hiring full-time headhunters to recruit organic growers. In an extreme move, some are even buying land and farming themselves to ensure supply.

Declining Farm Income: Farm incomes have been in a long-term decline.  This is mostly due to the high cost of inputs (energy, water, fertilizers, farm chemicals) and high prices of farmland squeezing farm incomes.  Perversely, this is forcing even more short-term strategies that accelerate the use of industrial practices that are most damaging to natural infrastructure in an attempt to keep up with increasing costs.

Increasing Societal Costs: The costs from agricultural externalities are increasing.  Just one example, many mid-west communities are being forced to build very expensive drinking water plants to remove agricultural pollutants from drinking water.  Recently, Toledo, Ohio was forced to shutdown municipal water service to over 400,000 residents due to algal blooms in Lake Eire caused by farm run-off.

Payments for Ecosystem Services: The consequence of escalating costs from the degradation of natural infrastructure is that municipalities, states, and even private utility companies are paying farmers to reduce the use of chemical inputs and preserve natural assets.  These payments include compensation for carbon sequestration, reducing erosion, preserving wetlands and wildlife habitat, and conserving agricultural land threatened with development preservation.

The IVE Exchange — Converting Natural Assets To Financial Capital

IVE creates innovative financial products, aggregates information, and employs exchange technologies to value and convert natural capital to financial capital. The exchange’s master financial instrument is the IVE Derived Equity. Natural assets on the land are described by an index of values, very similar to the index in a stock ETF. The Soil Index includes individual species and their genetic potential, ecosystem services such as provisioning of fresh water, flood control, sequestration of carbon, increased crop genetic diversity, reducing systemic risk, providing home to wildlife, climate modulating services, etc. The indexed values inform the equity price.

Steps In Converting Natural Assets To Priced Natural Capital

  1. Enroll acres into a IVE trust holding company;
  2. Aggregate data and assessments on value of natural assets;
  3. Holding company share capital distribution;
  4. Initial public offering creating financial capital from natural assets.

Creating a natural market (one based on the value and productivity of real assets) for natural capital on agricultural lands creates two vitally important results:

  • Price signaling to inform land use practices and the true cost of producing agricultural goods and services;
  • Financial capital based on the farmer’s preservation and production of natural capital and ecosystem services.