The Brasil Innovation Lab for Climate Finance – a group of public and private investors and finance experts on land use and energy in Brazil – continues to make progress on three financial instruments which could catalyze large-scale investment in Brazil. Brasil Lab Members recently convened to review progress on […]Read More
In Brazil, cattle ranching activities have triggered 70% to 90% of overall deforestation in recent years, making it the leading cause of country-wide greenhouse gas emissions – around 75%.
Changing current cattle ranching practices in Brazil to a sustainable, intensified approach would not only reduce deforestation and GHG emissions, but would also improve overall productivity by 3-4 times, increasing profitability to ranchers, and bringing technology, expertise, and jobs to remote areas.
In order to restore the 100 million hectares of degraded pastures in Brazil and accommodate the intensification of Brazil’s cattle production, cattle ranchers will need an estimate of up to USD 100 billion, a number which may increase exponentially when accounting for technical assistance and additional resources for livestock health.
However, around 80% of ranchers in the Amazon region lack access to finance necessary to support the adoption of such measures and practices, in large part because they do not have official land titles for their pastures. Without land titles acting as a guarantee, commercial banks are not able to offer traditional lending services.
Compounding this challenge, the lack of technical knowledge and ongoing support for the implementation of practices that would increase intensification prevents ranchers from increasing their productivity and profits in order to pay the loans back.
Climate Smart Cattle Ranching (CSCR) is an innovative business model that serves as an aggregator for ranchers in order to negotiate better terms for products needed for intensification and forest restoration, as well as for high quality deforestation-free beef with meatpackers and retailers. It will also provide long-term loans to ranchers using other forms of guarantees, and will offer ranchers access to continued technical assistance for production, forest restoration, and financial management, as a condition of the loan, in order to improve the sustainability and productivity of their ranching practices.
The proponents of CSCR, Naturevest and The Nature Conservancy (TNC), already have an ongoing sustainable cattle intensification pilot project in the municipality of São Felix do Xingu, in the state of Pará, which holds the greatest number of cattle in the country: 2.2 million heads across approximately 2.3 million hectares. Forty-three farms, comprising approximately 40,000 hectares of pastures, are participating in the pilot, with very positive results. Ranchers have increased their overall productivity, are becoming compliant with the Forest Code, and have been supplying higher quality beef at better prices to meatpackers.
After the success of this pilot project, the Nature Conservancy conducted a survey with ranchers in the region, which indicated that over 100 ranchers would be willing to implement more sustainable ranching practices in exchange for access to credit. Moreover, the Conservancy estimates that in its first year, CSCR operations could cover up to 300,000 hectares in the first five years.
CSCR will set up a New Company (NewCo) that will provide financial resources and technical assistance to cattle ranchers without land titles, and will also act as an aggregator of multiple ranchers in order to negotiate better terms for the inputs that ranchers will require for forest and pasture restoration and animal feeding, as well as better prices for the high quality deforestation-free beef that the ranchers will provide.
The NewCo will obtain initial grant funds and concessional capital from foundations, environmental funds and/or multilateral organizations. This investment will enable initial infrastructure and working capital to begin operations. The NewCo will forge partnerships with technical assistance providers and suppliers of products needed for intensification and forest restoration. Partners will assess ranches and provide diagnostics for intensification and legal compliance, together with an action plan for implementation and capital costs. Intensification could take between 3 and 4 years for completion, whereas labour and environmental compliance commitments should be met in three years.
This initial capital would also be used to build in-house capacity for the aggregator role, negotiating and providing to off-takers 100% traceable higher quality beef from ranches that meet Brazil’s labour and environmental laws. As an aggregator, the NewCo will also be instrumental in securing lending resources for ranchers, using concessional capital and impact investment resources as a leverage mechanism to de-risk commercial/private financing. Traceable livestock will serve as built-in guarantees for loans to ranchers without land titles, using existing monitoring mechanisms, plus bolus technology that can identify the ownership of a slaughtered animal.
As the NewCo generates positive cash flows, increases its customer base, and develops a track record a positive track record, the NewCo and its initial equity partners will then seek commercial investors for expansion of the business model through the implementation of a franchise system, thereby scaling the model to additional ranches, and regions in Brazil.
Cover image courtesy of Kelly Sato, via Creative Commons