Nutrients Trade Launched

Ohio River Basin Project Tested; Program Success to Hinge on Farmers

Todd Neeley
By  Todd Neeley , DTN Staff Reporter
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Wayne County, Ind., farmer Steve Meyer is among many Ohio River basin farmers who are keeping an eye on the recently launched nutrients trading credit program. The program developed by the Electric Power Research Institute executed its first credit trade Tuesday in Cincinnati, Ohio. (DTN photo by Todd Neeley)

CINCINNATI (DTN) -- Farmers in the Ohio River Basin will get paid to expand conservation practices and reduce nutrient loads in the river as part of the country's first-ever interstate program for water-quality trades.

The Electric Power Research Institute completed a transaction Tuesday on the interstate credits for water nutrients trading during the launch of a voluntary Ohio River Basin pilot program. State officials, farmers and others acknowledged the program will depend on farmers' willingness to expand conservation and on energy companies and others success in building trust with the agriculture community.

The trading program, which has been under development since 2009, was touted heavily by USDA, the Environmental Protection Agency and groups such as American Farmland Trust.

Duke Energy, Hoosier Energy and American Electric Power purchased a combined 9,000 stewardship credits from some 40 to 50 ag producers who signed five-year contracts to take part in the program upstream of the companies' power plants.

The companies agreed to then retire the nutrient and ecosystem benefits rather than use the credits toward possible future water discharge permit requirements. The idea is that not allowing the credits to be traded beyond the original purchase will result in real water quality improvements. The purchase allows the power companies to take advantage of nutrients reductions realized as a result of farmers' conservation measures.

Though similar nutrients trading programs already have been launched at the state level, including in Ohio, the trade marks the first time such nutrient trading has been made across state lines. The pilot program includes farmers and power companies in Indiana, Ohio and Kentucky.

Buyers are allowed to use purchased credits to meet corporate sustainability goals or to be considered for future permit compliance schedules.

Jessica Fox, an Electric Power Research Institute technical executive and director of the water quality trading program, said the initial credit transaction should have immediate benefits on parts of the Ohio River watershed.

"These early credit transactions will immediately improve watershed and farm health, and will serve as a foundation for ongoing discussions on the potential for water quality trading to meet regulatory compliance obligations in the future," she said.

Wayne County, Ind., farmer Steve Meyer, who grows corn, soybeans and wheat on some 1,200 acres, told DTN although he has yet to be a part of the program, he is interested in the concept.

The program could generate more interest in and attract private dollars to expanding conservation at a time when government funds are tight, Meyer said.

Meyer said his farm has used all no-till for some 35 years and in 2012 he returned to cover crops after struggles in the 1990s. He spends about $40 an acre for cover crops on a couple hundred acres. It is yet to be seen whether selling credits will benefit the bottom line, he said.

Credits are paid based on measured reductions in nutrients such as nitrogen and phosphorus. Initial three-year credits were priced at $10 a pound. Actual market prices could change once the full program is underway and credits are traded.

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One program official said it is unclear exactly what the credits are worth in the market. The program may have a better idea about those prices following a planned credit auction in the fall.

Meyer told DTN he's unsure whether he will get involved in the program. He still waits to see how much credits could be worth and whether selling credits would yield enough financial benefit to justify further expanding cover crops or other measures.

"This program came up and I thought it was something I'm already doing, why can't I build on this?" he said. "I'm doing it because I believe it's the right thing to do. I hope my peers look at me being successful and I hope they can apply it to their farms.

"The biggest thing is to find people who are concerned about doing a good job in being good stewards. The one thing that I'm concerned about are the way crop prices are turning. When profits are good, that $40 an acre on cover crops is not hard to justify. Now at current crop prices, it may be a zero-sum game."

VOLUNTARY PROGRAM

Ted McKinney, director of the Indiana State Department of Agriculture, said farmers in his state support a trading program as long as it remains voluntary.

"We like to believe we're innovative in Indiana," he said. "Farmers are an independent lot. We believe in this program. We are interested in seeing it sustain itself. We're already seeing farmers step up and do incredible things to reduce nutrients runoff and it is dramatic. We see this as a big part of our future.

"It comes down to trust. If at any moment it is inferred that this will be regulatory, I think you'll see agriculture running the other direction, fast. As long as it is voluntary and they are seeing results, then farmers have a strong preference to leave it voluntary."

Fred Hammon, program manager at the Ohio Department of Natural Resources, said the challenge for the trading program is to find ways to make it long-term.

"As we develop these programs we have to figure out a way to make them sustainable," he said.

"The costs of the trades need to cover the costs of the program."

Right now EPRI officials say they continue to study how much the program will cost to sustain and whether market demand will be there to maintain the program.

Tom Easterly, a commissioner with the Indiana Department of Environmental Management, said it will take time to fully quantify environmental benefits coming from nutrients trades.

Program organizers with EPRI have developed a computer model that helps determine nutrients reductions achieved and the potential value of credits purchased from companies downstream.

In August 2012, Indiana, Kentucky and Ohio signed a first-of-its-kind interstate trading plan. With the plan the states operate with the same rules so a water quality credit generated in one state can be applied in another.

At full-scale, EPRI said the project could include up to eight states in the basin and could create credit markets for 46 power plants, thousands of wastewater facilities and other industries, and could include some 230,000 farmers.

Pilot program credit trades are expected to continue through 2014 and 2015 to test the program that includes an online credit registry and live trading auction.

Fox said some of the biggest challenges in launching a credit trading program are measuring the nutrients reductions while maintaining farmers' privacy in sharing information with EPRI.

"We have to quantify to meet permit limits" for nutrients runoff from power plants," she said.

"How do you get rigor in place and still respect farmers' rights on their information? That's a challenge and I do not have an answer."

John Schroer, Switzerland County, Ind., producer who farms along the Ohio River, said cover crops already are an important tool on his 3,000-acre farm.

"This is an exciting project," he said.

"I planted cover crops in ground that is prone to flooding. I own this property so I don't want to lose it. When my soil goes away, my nutrients go away. I want to help do my part. On our farm I've been in cover crops for six years with no government programs. I feel comfortable. We're seeing positive results from the financial side of it."

Todd Neeley can be reached at todd.neeley@dtn.com.

Follow Todd on Twitter @toddneeleyDTN

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Todd Neeley

Todd Neeley
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