Soil organic matter

What Is Soil Organic Matter?

Soil organic matter (SOM) refers to the organic component of soil, consisting of plant and animal residues at various stages of decomposition, living and dead microorganisms, and humus, which is a stable form of organic carbon. While primarily an ecological concept, its importance extends into sustainable finance and investment, particularly concerning land valuation, agricultural commodities, and ESG investing. A higher content of soil organic matter generally signifies healthier, more productive soil, which can enhance the resilience and profitability of agricultural operations.

History and Origin

The recognition of soil organic matter's critical role in agricultural productivity dates back centuries, with early farming practices intuitively building soil health through techniques like crop rotation and the application of animal manures. However, its formal study and integration into economic and policy discussions are more recent. The advent of modern industrial agriculture, with its reliance on synthetic fertilizers and intensive tillage, often led to declines in soil organic matter, prompting a renewed focus on its importance for long-term sustainability. In recent decades, growing awareness of climate change and environmental degradation has propelled soil organic matter into the financial discourse, particularly through concepts like natural capital and carbon sequestration. For instance, the Obama Administration in 2016 highlighted significant investments from both private firms and government agencies into soil sustainability initiatives, underscoring its emerging financial relevance⁵.

Key Takeaways

Soil organic matter is a crucial indicator of soil health, fertility, and water retention capacity.
It plays a vital role in carbon sequestration, making it relevant for climate change mitigation and carbon markets.
Increased soil organic matter can lead to reduced input costs and higher yields for agricultural businesses.
Investment in practices that enhance soil organic matter aligns with environmental, social, and governance (ESG) principles.
The economic benefits of improved soil organic matter are becoming increasingly quantifiable, influencing land valuation.

Interpreting the Soil Organic Matter

In a financial context, interpreting soil organic matter levels involves assessing the intrinsic value and future productivity of agricultural land. Higher levels of soil organic matter are generally associated with land that is more resilient to environmental stressors like drought and excessive rainfall, requires fewer synthetic inputs, and can consistently deliver higher yields. This translates into lower operational risk management and potentially higher return on investment for agricultural enterprises. Investors may look for land or companies demonstrating a commitment to building soil organic matter as part of their due diligence for sustainable agricultural investments.

Hypothetical Example

Consider an investment firm, "AgriVest," evaluating two potential farmland acquisitions: Farm A and Farm B. Both farms are similar in size and crop type. However, during their analysis, AgriVest discovers that Farm A has consistently higher soil organic matter levels (e.g., 4%) compared to Farm B (e.g., 2%).

AgriVest's investment thesis would consider that Farm A, with its richer soil organic matter, is likely to:

Require less capital for inputs such as fertilizers and irrigation, leading to lower operating expenses.
Exhibit greater resilience to adverse weather conditions, potentially reducing yield volatility.
Command a higher long-term land value due to its sustainable productivity and environmental benefits.

Based on this, AgriVest might allocate more capital to acquire Farm A, or demand a lower price for Farm B to account for the necessary investments to improve its soil organic matter content and bring it to a more productive state, thereby influencing their asset allocation strategy.

Practical Applications

The financial implications of soil organic matter are increasingly recognized across several areas:

Agricultural Investment: Investors in agricultural land and businesses often consider soil organic matter as a key indicator of long-term productivity and sustainability. Practices that build SOM, such as cover cropping and no-till farming, are increasingly seen as value-enhancing strategies for farmland. SLM Partners, for example, highlights the "investment case for ecological farming," emphasizing how building soil health can lead to superior risk-adjusted returns⁴.
Carbon Markets: Soil organic matter is a major component of soil carbon, making it central to carbon sequestration efforts. Farmers can potentially earn carbon credits by adopting practices that increase soil carbon, providing an additional revenue stream. The European Commission has explored initiatives to operationalize carbon farming, acknowledging its potential to mitigate climate change and provide economic benefits³.
Corporate Supply Chains: Major food and beverage companies are investing in regenerative agriculture practices to build soil organic matter within their supply chains. This helps them meet sustainability targets and can enhance the resilience and reputation of their brands. Companies like Unilever, McDonald's, and Nestlé are actively supporting regenerative agriculture projects to improve soil quality and reduce their environmental impact.²
Lending and Insurance: Financial institutions are beginning to incorporate soil health metrics into their lending decisions for agricultural loans and even into agricultural insurance products, recognizing that healthy soils can reduce default risk and crop loss.

Limitations and Criticisms

While the benefits of increasing soil organic matter are widely acknowledged, its direct financial quantification can present challenges. Measuring and monitoring soil organic matter accurately across large agricultural landscapes can be complex and costly. The economic benefits, while substantial, may materialize over a longer time horizon, which can be a barrier for farmers seeking immediate returns or for investors with short-term horizons. Additionally, the specific financial value of soil health practices can vary significantly based on factors like soil type, climate, crop, and existing farm management practices. Some studies indicate that while soil health practices improve profitability for a majority of farmers through reduced costs and increased resilience, the exact financial gains are not uniform.¹ The complexity of translating ecological benefits into precise financial metrics remains an area of ongoing research and development within the realm of sustainable agriculture.

Soil Organic Matter vs. Carbon Credits

Soil organic matter and carbon credits are related but distinct concepts. Soil organic matter refers to the physical component of soil composed of decomposed organic material, which acts as a storehouse for carbon. It is a measure of the health and fertility of the soil itself. Increasing soil organic matter directly leads to increased soil carbon.

Carbon credits, on the other hand, are a financial instrument representing a verified reduction or removal of one tonne of carbon dioxide equivalent (CO2e) from the atmosphere. They are tradable permits used in commodity markets to offset greenhouse gas emissions. While soil organic matter can contribute to the generation of carbon credits through improved [carbon sequestration] (https://diversification.com/term/carbon-sequestration) in agricultural soils, the credit itself is a financial asset, not the physical substance of the soil. The value of a carbon credit is determined by market demand and the specific protocols for verification, whereas soil organic matter's value is inherent in its contribution to soil productivity and ecosystem services. The link between them is that healthy soil, rich in organic matter, can lead to the creation of verifiable carbon assets.

FAQs

Why is soil organic matter important for investors?

Soil organic matter is important for investors because it directly impacts the long-term productivity, resilience, and therefore the valuation of agricultural land and businesses. Higher SOM can lead to reduced operational costs, increased yields, and a lower environmental risk management profile, aligning with sustainable and profitable investment strategies.

How does soil organic matter affect a farm's profitability?

Soil organic matter enhances a farm's profitability by improving soil structure, water retention, and nutrient cycling, which can reduce the need for expensive synthetic fertilizers and irrigation. This leads to lower input costs and often more stable or higher yields, contributing to increased net farm income.

Can increasing soil organic matter generate revenue?

Yes, increasing soil organic matter can indirectly generate revenue through enhanced crop yields and reduced input costs. Additionally, in regions with developing carbon markets, the increased carbon sequestration associated with higher soil organic matter can potentially generate tradable carbon credits, providing an additional revenue stream for farmers.