Trends in Private and Public Finance build the case for Agroforestry Investment

Written by Harry Greene

Unlocking the Market for Land Degradation Neutrality” is a highly informative white paper from Renee Cheung and Sarah Maillard of Bonterra Partners and Mirova. For those that have available bandwidth and are interested in this subject matter, we’d highly recommend reading the original document. Here, we’ll present you with an analysis as it relates to Propagate Ventures.

Propagate Ventures: Financing Regenerative Agriculture

The United Nations Convention to Combat Desertification (UNCCD) is currently seeking out private capital, by way of a public-private partnership (PPP), to catalyze investment in land rehabilitation. On its own, public non-market capital has been insufficient in halting global land degradation. Mirova and Bonterra Partners were tasked with researching what such a partnership would entail, and recommending viable next steps.

Propagate Ventures is an actor in the land-degradation neutrality market: we design and fund farm operations that go beyond sustainability. In our context, “multi-species” agriculture is synonymous with regenerative agriculture, and mainly refers to agroforestry. Agroforestry is succinctly defined as the incorporation of useful trees onto working farms. We use the term “multi-species” because it describes our business model more precisely. “Regenerative” and “degradation” are at opposite ends of the land-use spectrum. Here we analyze global trends in land regeneration, per Mirova, as they relate to Propagate Ventures.

What is Land Degradation and Why do I Care?

Land degradation is the reduction in the capacity of the land to filter our water, clean our air, and provide us with food, among other ecosystem services. Ecosystem services are defined as any positive benefit that a healthy natural environment provides us with, directly or indirectly. Trees remove carbon dioxide from the atmosphere, hiking trails provide us with enjoyment, and forests prevent downstream flooding that would otherwise wash our crops away: these are all examples of ecosystem services. Globally, from land degradation, we lose between $6-10 trillion per year in ecosystem services. A tangible example of this is deforestation causing flooding downstream. Forests hold water like a sponge, while cropland holds water like a brick. Forests also filter our water: New York City water quality experts understand the value of upland forests in keeping the city’s tap water clean.

The province of Misiones, Argentina juts out into monocropped Paraguay and Brazil. Misiones is known for its national parks and agroforestry

The province of Misiones, Argentina juts out into monocropped Paraguay and Brazil. Misiones is known for its national parks and agroforestry

Above is a satellite image of the Argentine province of Misiones. Misiones is known for national parks, and yerba mate cultivation, while Paraguay, to the Northwest, has been almost completely deforested. When it rains on Misiones, the water soaks into the ground, and when it rains on Paraguay, on impermeable corn and soy fields, the water runs off. Long hair stays wet longer than does short hair. Towns along the Río Paraná, which separates the two countries, consequently get ravaged by floods.

As Propagate Ventures, we work with large corporate actors, while our feet are firmly planted in the soil. Our business model aligns directly with what the United Nations calls for in reversing land degradation, and we constantly tailor how we explain our value proposition to our audience. We “increase regional and national food security by financing multi-species agriculture,” and at the same time “provide indirect payments for ecosystem services by catalyzing agroecological farming practices.” On the ground, our niche is agroforestry, which in turn is manifested in fruit, nut, and timber trees.

Alley-cropped poplar and wheat in Southern France: timber and food crops are not mutually exclusive.

Alley-cropped poplar and wheat in Southern France: timber and food crops are not mutually exclusive.

So often our culture pins food production against conservation, but we shatter the tradeoff between farming and sustainability. A pine forest produces less food than a cornfield, but trees and crops are not mutually exclusive. We work directly with farmers to expand profitable, scalable systems that restore the health of our rural landscapes. We deploy capital to those that can use it best.

From a satellite image, it is extremely difficult to distinguish between native rainforest and a shade-grown coffee plantation.

From a satellite image, it is extremely difficult to distinguish between native rainforest and a shade-grown coffee plantation.

Trends: Who else is doing this, and how is it working out for them?

Globally, there are many successful actors in land-restoration finance, along with trends that stem from their work. Per the white paper that is at the center of this article, successful projects exhibit benefit, scalability, and profitability. This is central to our analysis moving forward.

Let us also outline the scale that other actors have found appropriate. The majority of funds raise $100-250 million every 2-4 years. In accordance with the limitations to scalability that we will discuss shortly, managers don’t want to raise more capital than they can effectively deploy. These funds are often structured as limited partnerships with a duration of at least 10 years.

Quantitative Trends: What does the path to success look like?

Let us return to our three characteristics common to private-capital-driven land restoration: benefit, scalability, and profitability. First, funds must be effective in rehabilitating degraded land. There is extensive research showing that increases in the quantity and diversity of above-and-below-ground plant matter, coupled with good management, increases the resilience of a land base. There are a myriad of ways to measure this, but one simple metric is land greenness. On a satellite image, how dark a shade of green is the land?

In our context, scalability and profitability can also be expressed as risk and return. Risk has everything to do with perception, and when the complexity of a system renders it unapproachable, we perceive it to be non-replicable. A cornerstone of Propagate Ventures’ business model is to create approachable, replicable systems. Separately, intensively-managed grass-fed beef and poplar plantations are replicable. When combined, they continue to be replicable. Frankly, grazing cattle between and beneath rows of trees is not prohibitively complex.

According to Cheung and Mailard, the scalability of land regeneration is also challenged by high identification costs. This stems from the idea that even if a practice makes sense financially and ecologically, it must also make sense culturally. Soil is much easier to change than people are, and the process of adding value to land must generally be in line with a region’s social dynamics. A mobile app or a beverage brand exhibit social barriers to adoption that are readily understood by the educated investor. These barriers are simply different than those associated with shifting the cultivation of thousands of acres of land. Consequently, direct interaction between projects and investors can result in confusion. To address this, our portfolio of agroforestry investments serves as a cash-flow aggregator, and our team serves an intermediary between farmers and investors. 

A well-managed grass-fed beef herd is profitable, as are tree crops such as chestnuts or cider apples. When combined on the same piece of land, their individual viability does not diminish. The return of a risk-return profile is relatively straightforward, and we can address this directly. The typical IRR for land degradation projects is 7-10%. Our IRR from operating cash flow hovers around 12%. This is without taking into account the increased asset value of our land holdings. In developed nations, many actors build value into real assets. A piece of land must use organic practices for three years before it can become certified-organic. Organic cropland exhibits a ROI that is 10 percentage points higher than conventional cropland, and land values display a 89% correlation with what they can produce. Consequently, moving farmland into organic production increases the asset value of that land. In our context, that transition period would entail seeding the land to perennial pasture, and grazing it. Grass-fed beef commands a premium price independent of organic certification.

At the end of the day, investors are attracted to management firms that provide value to society outside of job creation per the normal cycle of business. Concepts such as ESG (Environmental Social and Governance) and SRI (Socially Responsible Investing) are known to provide effective differentiation. According to Mirova, there is no shortage of cash, but there is a shortage of long-term-oriented, patient cash. Investors understandably groan at the idea of having to wait 10-12 years. The returns from agroforestry are substantial and well documented, but they exist in the future and we cannot expect the viral growth that we expect from mobile apps. To address our economic myopia (though it is all too human), Propagate Ventures prioritizes short-term cash flow in addition to perennial value and ecological benefit. Our sources of early-year cash flow stems from the securitization and resulting exchange of long-term tree crop forward contracts. Over the long-term, our investments must stand on their own, and our portfolio does not require non-market support. Nonetheless, as innovators in agroforestry finance, to ease the uncertainty our model presents, we are willing to supplement  with payment for ecosystem services from sources such as corporate philanthropy. Please contact us with inquiries. The future is regenerative.

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