Ecosystem service markets offer private landowners a potential source of additional. Recalling that Ricardian Space (Vol. 2, Num. 2) refers to the indestructible characteristics of soil and the land, managing ecosystem services recognizes that other landscape features form a dynamic pattern. The features respond to environmental and cultural agents of change. Two examples of features are vegetation and stream channels. The patterns on the landscape are not only pleasing to the eye, but they provide a renewable cache for wildlife habitat, clean air and water. Because the services derived from these resources have public benefit not typically priced in markets, they compete with cash for land uses that are directly priced.
When population grows, the economic process extends its reach to modify landscapes patterns. Businesses transform raw materials into goods and services. In addition to natural resources, economic activity requires energy to transform the materials, space to host the activity, and sinks to absorb the residuals not incorporated into products. When the scale of economy expands, so does the altered pattern on the landscape. Although land exists before and after, the natural features change. Under some conditions, the resources decrease below thresholds to sustain the ecosystem services that support economic activity.
Ecosystem service "rent" is a market based strategy to level the playing field between private and public benefit by offering incentives to private landowners. The incentives intend to retain natural structures on the landscape at levels which sustain public services. In the following sections, the reader will find: 1) an atlas example of contrasting pattern within an agricultural community, 2) an overview summary of an existing federal rent program, and 3) a metric that measures the relationship between real estate and agricultural values of working lands.
Water resources present a complex set of competing benefits in the arid west. Farms and ranches depend on irrigation. Irrigation extracts water from reservoirs, aquifers, or stream channels. The energy source to run the water pumps often comes from hydroelectric facilities. The dams alter the timing and quantity of in-stream flows, which can impact anadromous fisheries habitat.
The atlasdisplays an example of alternative landscape patterns in a farming and ranch community dependent on irrigation. To view the atlas, click on the "View Larger Map" tab. Switch between terrain (Ter) and the Satellite(Sat) display options.
Thumbnails of two ground photos appearon the large map. Click on each thumbnail to enlarge the ground photo. The photoin the upper center of the atlas overlooks a ranch that uses flood irrigation. Notice the contrasting pattern of that property with surrounding properties that invested in center pivot irrigation. Stream channels and vegetation form a pattern that reflects a different level of habitat quality on the flood irrigated property.
The second photo, to the southeast, includes property along the river ( in the photo background). The local real estate market prices these properties higher than their inherent productivity. These prices reflect a land market that pressures private ranch owners to sell residential parcels with river frontage. Developers regularly express interest in these farms and ranches because of demand for rural properties..
Landowners receive rent payments today for ecosystem services through several USDA programs. The Conservation Reserve Program reported in January 2009 that annual rent payments for the year will exceed $1.7 billion, with an average per acre rent payment of $51.20. The program originally was established to reduce erosion (the "indestructible " soil resource). In recent years, the Farm Bills expanded the program to include sensitive riparian buffers and other habitat features of rural landscapes.
The agency determines maximum rental rates based on local soil productivity for commodities grown in the area; growers can bid a lower price to compete for the dollars available in their area. The duration of the landowner agreements ranges from 10 to 15 years. The payment is an incentive to the landowner to choose between two land uses: cultivation and a conservation alternative. The incentive supports a pattern on the landscape that intermixes crops with other landscape features that provide public benefit. The department rates potential public benefit for the candidate properties. Market prices of the crop alternative set the level of the incentive, but the public finances the rent payment through tax revenue and federal government budgets.
The 2007 Agricultural Census reports total conservation payments to landowners. The map (inset) summarizes the county totals for the combined payment from four USDA programs: Conservation Reserve Program, Conservation Reserve Enhancement Program, Wetlands Reserve, and Farmable Wetlands.
Click on the map to view a printable document of the Western U.S. Note that the county dollar totals are in thousands.
Market based approaches to environmental services are anticipated to be a cost-effective tool that will achieve stewardship objectives. In the communities on the edge of national forests and other federal lands, the transactions in these markets will compete with real estate markets. Incentives to landowners for stewardship practices may or may not be sufficient to retain private working lands, depending on development pressure from local real estate markets. These two interrelated markets - real estate and ecosystem services - influence decisions made by private landowners. A prospectus for investors in ecosystem services should also address these competing markets. Potential investors include government agencies, private investors, and nongovernmental organizations. . What is the relative risk of land use conversion?
An example of relevant information compares crop production with farm market value. The USDA National Agricultural Statistical Service (NASS) publishes data annually that reports the relative values based on surveys. The statistics include state averages for the market value of cropland and pastures as well as average cash rent paid by farm operators to landowners.
The published state averagesprovide the basis for a metric that compares price to earnings (market value/cash rent) . The metric divides the average land value by the average cash rent. For example, assume an average farm valued at $1,000 per acre, with an average annual cash rent of $100/acre. The metric is 10. Similar to price earnings ratios in the stock market, the land "investor" interprets this metric as the number of annual payments required to equal the market value of the land, if sold today. The index is sensitive to market changes in either the land value or crop prices. A P/E range between 10 and 20 reflects land values dominated by annual operating revenue of a farm or ranch, with little influence of speculative real estate market. The index varies depending on the capitalization rate. Values above 20 indicate increasing market demand for alternative uses.
The figure (above) compares four states (Arizona, Colorado, Idaho and Montana) for the period 2004-2008. The value of the metric increased in all four states for the first four years, shadowing the housing market trend. For year five, the metric flattened or decreased. Idaho's decrease in the fifth year resulted from a 20% jump in average cash rent. The ratio for Arizona, a state that experienced rapid growth for the period, ranged from 40 years to over 60 years.
The averages hide variability in local conditions. During the housing boom before the real estate bubble, high demand recreation property in Idaho had a P/E that exceeded 300 years. A landowner could choose to continue ranching for 300 years and receive the equivalent value if he sold the property today - not much of a choice. Historically, NASS annual publications report a relative measure of real estate conversion pressure across all 50 states. As the metric increases, likelihood of land conversion follows with it.
The competing markets have implications for environmental services markets. Ecosystem service payments offer a potential increase in annual income to a landowner. Combined with other land based operating revenue, the added income will decrease the price/earnings metric. If the rental payment reduces P/E below 20, the landowner will have an incentive to retain the productive use of the property. This situation differs from payments in the Conservation Reserve Program which replace crop income, but are not accretive for the acres receiving payment. In some markets, ecosystem service rent may be a sufficient payment to achieve both the desired service and deter conversion. Conversely, in "hot" real estate regions, the payments will be inadequate to compete with the revenue from a land sale. For service "rental payments", investors should be informed about relative risk of conversion.
In addition to the P/E metric serving as an indicator, the status of land use planning support for working lands is a relevant due diligence factor. Communities that commit to a desired scale of the agriculture sector in their economic development plans establish a market framework for land prices. Other communities defer to market allocation in absence of a land use and development framework. For these communities, every landowner expects his property to have the maximum development value, and anticipates a high P/E for the property high. The expectation influences the owner's land use decisions and increases risk to the ecosystem service investor.
A prospectus for an ecosystem service market ought to inform investors about these conditions. An informed investor, public or private, will assess risk, and prudently invest the incentive where the cache will likely be retained on the landscape. The financial incentives will influence private landowner behavior towards public benefit. The pattern of the cash flow from the incentives will have impact visible on the landscape, resulting in a public benefit that is a spatial interest.