Plowing Bedrock

The previous post “Vagrants on the Earth:  Implications of Top Soil Loss” explained the threat to the world’s food production that is presented by the dramatic loss of healthy, friable soil for crop production.  There appears to be a wellspring of data available all pointing to the rapid loss of the very foundation of the human food chain. 

The USDA Natural Resources and Conservation Service estimates that natural processes can require as many as 500 years to form one-inch of top soil.  That seems like a very sluggish pace until you consider all the work involved.  Soil formation starts with rocks and minerals that are broken up by water and wind erosion.  Freezing and unfreezing action in cold climates also play a part in breaking up rocks into sand, silt and clay particles.  Organic matter is broken down by micro-organisms and is worked through the particles by earthworms.  Moles and shrews dig burrows that aerate soil and mice bring in seeds and other plant materials.  Larger animals like pigs turn over the mixture while exploring for food. Voila, top soil!

The slow pace of soil formation would not be worry if the loss in top soil was occurring at the same pace.  Unfortunately, the U.S. is losing top soil about 10 times faster than it is replenished.  China and India are experiencing top soil loss 20 to 30 times faster than those little earthworms, shrews and mice can do their magic.  It is estimated that in about 100 years farmers will have nothing left to plow but bedrock.

The situation is begging for solutions.  Investors can take their pick of two possible approaches:  slow the pace of top soil loss or accelerate the pace of top soil formation.  Probably both are needed.  Indeed, there is a fledgling economy of soil restoration building around the world. 

Extending fallow time is one option often recommended by agronomists to help improve soil quality.  Of course, leaving a field untilled only works well if there is sufficient ground cover to prevent wind and water erosion.  Trees are an obvious option.  Another option is plants like legumes that bring their own nitrogen fertilizer to the soil.  We look at five companies that generate returns for shareholders by restoring and maintaining healthy soil.

Technology for Trees

Land Life Company, based in Amsterdam, has made reforestation of degraded land its business plan.  The company is applying a patented technology called Cocoon to lower the cost of planting and growing trees.  The Cocoon is a biodegradable cardboard contraption shaped like a donut and filled with water.  It incubates and shelters the tree seedling for at least  a year.   The Cocoon system relies on autonomous planting, remote sensing and blockchain verification. Drones are deployed to first gather data on how the soil has deteriorated and then monitor tree growth.

Cocoon System

Customers of land life include governments and non-profits.  However, Land Life’s commercial customer list is expected to grow as polluting companies voluntarily seek credits to offset their carbon footprint.  Among the first to sign up is a car leasing operation that offers car renters an opportunity to offset emissions through Land Life.

In late 2018, Land Life took in $4 million in new capital through a Series A round.  Proceeds went to planting 300,000 trees and building out the Cocoon technology.  Most likely there will be subsequent investment rounds given ambitious goals to plant two billion hectares of trees (4.9 billion acres).  Expect those future rounds to be well thought out.  Land Life is led by ex-McKinsey partner Jurriaan Ruys, who has plenty of experience in capital markets.

Timber Stake

A stake in Land Life could deliver a compelling payoff for long-term investors who have a tolerance for risk.  For those who are more income minded, The Lyme Timber Company could be more interesting.  Lyme is a private timberland investment manager otherwise known as a TIMO (timberland investment management organization).   The company’s goal is to earn income for its investors through sustainable conservation practices.  Maintaining soil productivity is at the top of Lyme’s list of management practices.  The current timber portfolio includes 700,000 acres of forest and undeveloped land in North America.

Lyme Timber - Pennsylvania Hardwood Forest

Lyme raises capital in pooled private equity funds that are popular with individual investors, family offices and foundations.  Most likely, investors can count on opportunities in the future that mirror Lyme’s last financing completed in July 2018.   The round provided the company with $50 million in new capital to buy 15,000 acres land in northwest Pennsylvania.  The purchase will bring Lyme’s holdings in the area to 67,000 acres and puts 51,000 acres into protected status.  The property will be actively managed to regenerate hardwoods such as black cherry. 

Another financing in August 2018, illustrates the creativity that Lyme and others have brought to conservation finance.  In August 2018, Lyme Time raised $20 million based on New Markets Tax Credits (NMTC).  The NMTC was established in 2000, to incentivize investment in low-income communities.  Lyme acquired 118,300 acres of timberland in West Virginia and Wyoming with the proceeds.  The West Virginia tracts are located in coal country where poverty and unemployment rates are high.  Lyme has pledged to introduce worker safety training and job quality standards to the logging industry in West Virginia.  The company will also introduce winch-assist technology that enables the use of safer harvesting machines on West Virginia’s steep mountain slopes where loggers otherwise fell trees by hand.   Lyme’s programs are expected to elevate worker skills, increase wages and create new jobs.

Unproductive Ground

Terviva, Inc. is produces oil from the pongamia tree seed.  Although not a household name, the pongamia tree has gained attention as a potential biofuel feed stock.  Its scientific classification is Millettia pinnata in the Fabaceae family.  Pongamia is a hardly little evergreen native to the tropics that can grow near either fresh or salt water.  It is drought resistant and grows well in shade or full sun.  Pongamia sprouts numerous pods bearing seeds that are about 25% to 40% oil.  Pressed and clarified, pongamia oil has long been used as lubricant, lamp oil or for soap making.

Pongamia Seed Pods

What makes pongamia interesting for soil conservationists is that it is a legume that fixes nitrogen in the soil.  Bacteria in nodules on the legumes roots capture atmospheric nitrogen.  Legumes improve soil health even better than fallow because they add nitrogen and organic matter to the soil all while reducing erosion. 

Using pongamia means a tree crop developer like Terviva can count on planting on marginal or worthless land that can be acquired or leased a low cost.  Terviva is going into business on abandoned citrus land in South Florida using existing planting beds and irrigation infrastructure.  It will take about five years for the first seed production and another three to four years before a pongamia tree reaches full potential. 

The business case gets a boost from other pongamia characteristics.  Relatively unnoticed to this point, pongamia is genetically diverse.  This should reduce tree loss to disease and pests.  The company is also planning to use standard nut handling equipment.  For example, a mechanical pistachio harvester can be used to shake free and collect the pods without damaging the trees or losing seeds.

Terviva is counting on their pongamia trees to produce 400 to 500 gallons of oil per acre.  Additionally, the company expects to sell seed cake for animal feed.  Yield is estimated to be as much as 3 tons per acre.  At the end of 2018, the company reportedly had 1,500 acres planted in the U.S. on distressed citrus fields and plans to test markets in India and Australia beginning in 2019.

In December 2018, the company raised $18.3 million, bringing total funding since inception in 2016 to $40 million.   Given the long lead time to first harvest, it is more likely than not Terviva will need additional capital in the years ahead.  Only investors with ‘Ent-like’ investment horizons will find a stake in a long-play like Terviva, but it would be interesting to be involved in a soil solution designed to turn a profit from the large and growing biofuel end-market.      

Real Estate Play

An investment article is not complete without a real estate play.  Farmland LP is a self-styled sustainable farmland investment company.  It owns and manages over 12,500 acres of farmland in California and Oregon.   Farmland’s business model is to capitalize on price premiums in organic foods by buying commodity farmland and converting it to organic certification through sustainable farming practices.    

Prudent soil management is apparently an important element of Farmland’s agricultural techniques.  Its management practices include growing more perennial corps, reducing the use of chemical fertilizers, and diversifying crop rotations.  Farmland also does something farmers have done since Cain and Abel put the first seeds in the ground  -  integrate livestock grazing between plantings to ‘automatically’ fertilize fields with animal manure.

In 2017, the USDA Natural Resources Conservation Service (NRCS) used its Ecosystem Services Valuation (ESV) model to evaluate the social and environmental impacts of Farmland’s fields. The NRCS analysis estimated that one set of Farmland properties generated $12.9 million in ecosystem service value since inception compared to a loss of $8.5 million that occurred if left under conventional agriculture practices.  Importantly, soil quality is one of the evaluation criteria.  Farmland overall generated positive soil quality on these properties, even though several individual parcels showed negative results.  

That is all quite impressive, but for investors it is more a matter of whether the land turns a profit.  That particular set of properties evaluated by NRCS is what Farmland calls Vital Farmland LP.  The 6,011 acres of land was acquired for $85 million. The fund closed in 2014 and so far has delivered a net cumulative return of 68.4%.

Farmland is looking for investors for its Vital Farmland REIT, LLC, which is holding 8,711 acres.  The targeted raise is $150 million with a minimum investment of $50,000 for each investor.  Even if organic food products is not an investor’s usual target, there is much to be said for the ease of due diligence that comes with the standard REIT structure and detailed financial and programmatic reports offered by Farmland.

Next Post 

Degraded soil has been used by these four companies as a core element in their business models by diverting low-cost land to alternative crops and otherwise deliberately upgrading the soil.  What of land that is under cultivation by farmers who intend to continue their crops?  In the next post we explore companies that offer products for farmers who want to move beyond harmful chemical fertilizers and soil management techniques.     

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.