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W O R L D R E S O U R C E S I N S T I T U T E

PAYING THEFARM BILL:

U.S. Agricultural Policy and theTransition to Sustainable Agriculture

PAUL FAETH

ROBERT REPETTO

KIM KROLL

Ql DAI

GLENN HELMERS

PAYING THE FARM BILL:U.S. Agricultural Policyand the Transition toSustainable Agriculture

Paul FaethRobert RepettoKim KrollQi DaiGlenn Helmers

W O R L D R E S O U R C E S I N S T I T U T E

March 1991

Kathleen CourrierPublications Director

Brooks ClappMarketing Manager

Hyacinth BillingsProduction Manager

T.L. Gettings/Rodale PressCover Photo

Each World Resources Institute Report represents a timely, scientific treatment of a subject of public concern.WRI takes responsibility for choosing the study topics and guaranteeing its authors and researchers freedom ofinquiry. It also solicits and responds to the guidance of advisory panels and expert reviewers. Unless otherwisestated, however, all the interpretation and findings set forth in WRI publications are those of the authors.

Copyright © 1991 World Resources Institute. All rights reserved.ISBN 0-915825-64-3Library of Congress Catalog Card No. 91-065300

Printed on Recycled Paper

Contents

I. Overview, Policy Analysis andConclusions 1

A. Introduction 1B. Principal Findings 10C. Conclusions and Recommendations .. 19

II. Technical Summary and SupportingData 29

A. Measuring Sustainability 29

B. On-Farm Costs of Soil Depletion 32C. Off-Farm Costs of Soil Erosion 36D. Pennsylvania Case Study 37E. Nebraska Case Study 45

III. Summary of Policy Conclusions 53

Appendix 61

Notes 63

References 65

Acknowledgments

W e wish to thank those who pro-vided assistance during theresearch and production process.

Of particular note are Gary Lesoing, of theUniversity of Nebraska's Research Station atMeade, who provided significant help in theinterpretation and proper use of agronomicdata for the Nebraska case study, and VerelBenson, of the Texas Agricultural ExperimentStation at Temple, who provided invaluable aidin the use of the EPIC model.

Thanks are due to the many people whohave reviewed earlier drafts of this researchreport including Kitty Reichelderfer, PatO'Brien, Chuck Hassebrook, Sandra Batie,Ford Runge, Paul O'Connell, Mohamed El-

Ashry, Bob Blake, Bob Livernash, Willy Cruz,Kathleen Courrier and Donna Wise. Specialthanks go to Kathy Lynch, who edited thereport, and Chuck Lee, who assisted at everystage of the project.

Finally, we owe thanks to Hyacinth Billingswho managed the production process, andKaren Holmes who very ably assisted in thedevelopment of the project.

P.F.R.R.K.K.Q.D.G.H.

Foreword

I n theory, U.S. agriculture is a businesslike any other, so depreciation of capitalassets should show up in calculating net

income. In practice, however, only man-madeassets are treated this way. Farmers depreciatebuildings and machinery, knowing that theirfuture income will fall if they don't maintain orreplace them. But they make no allowance forwear and tear when it comes to their mostvaluable assets—natural resources such as soiland water. Ruining natural assets costs moneyjust as surely as new barns or tractors do, soignoring resources is irrational. Farmers willpay in terms of lost productivity, but the largercost to the environment will eventually beborne by the nation as a whole.

This agricultural blindspot is perpetuated bygovernment policies and farm support pro-grams that mask the negative effects of soildegradation on crop yields and incomes. TheUnited States loses about 3 billion tons of itsvaluable topsoil from cropland every yeardespite the tens of billions of dollars it hasspent on promoting soil conservation sinceestablishing the Soil Conservation Service todeal with the Dust Bowl conditions of the1930s.

Commodity programs that penalize resource-conserving rotation are causing farmers to jeop-ardize their future income by allowing soils toerode, groundwater to be contaminated, wild-life to be poisoned, and reservoirs to silt up.Yet, alternative farming systems that result in

far less soil and chemical runoff are actuallyeconomically superior over much of America'sfarmland. To the extent that U.S. farmers,encouraged by perverse subsidies, are "livingoff their capital," their income is overstatedtoday—and at risk tomorrow.

In Paying the Farm Bill: U.S. Agricultural Policyand the Transition to Sustainable Agriculture, aresearch team comprising Paul Faeth, associatein WRI's economic research program; RobertRepetto, program director; Kim Kroll, an agro-nomist with the Rodale Research Center; QiDai, a research associate in the Department ofAgricultural Economics at Purdue University;and Glenn Helmers, professor of agriculturaleconomics at the University of Nebraska, ana-lyzes the changes needed to protect U.S. agri-cultural resources and income over the longterm.

Paying the Farm Bill forges critical links thatare missing in the current debate about sus-tainable agriculture, which is long on rhetoric,but short on policy analysis. The authors alsorectify omissions in past comparisons of con-ventional and alternative farm practices, few ofwhich compare farm profits under variouspolicy scenarios and none of which comparesthe economics of conventional and alternativeproduction systems when natural resources areaccounted for. These are key omissions sinceany comparison that ignores natural resourceswill overlook the primary justification of sus-tainable agriculture.

V l l

This report's case studies contrast the resultsof several farming strategies in two places withvery different kinds of land: Nebraska—wherethick topsoil, flat topography, and sparsepopulation limit damage from farm runoff—andPennsylvania, where soils are shallow and farmrunoff from the rolling hills drains into valua-ble lakes and estuaries. Implicit in the principalfindings is a critique of current U.S. farmpolicy and practices:

• Where erosion-prone soils are causing sub-stantial environmental damage both on and offthe farm, resource-conserving production sys-tems are economically superior. Even wheresoils are robust and environmental risks small,alternative farming methods can be financiallyand economically competitive.

• Current policy distorts comparative eco-nomics, inhibiting adoption of resource-conserving agricultural practices by makingthem less profitable. A system of farm incomesupport that was not based on commodity sup-port programs would remove distortions andmake sustainable production systemscompetitive.

• Farmers who adopt resource-conservingproduction systems may suffer some short-termloss of income during the transition, but thelong-term financial gains from maintaining orimproving their land's productivity are sub-stantial. The reverse is true with conventionalfarming methods. The greater the reliance onchemicals and the more disturbance throughconventional tillage, the more damage to thesoil. Falling productivity may be masked for awhile by high-input production methods, butthe economic loss is inevitable.

• Economic realities are obscured by tradi-tional farm accounting systems, but the factscan be laid bare by environmentally honestaccounting practices. In such a system, grossfarm income is reduced by a soil depreciationallowance. The economic impacts of siltationon recreation and fisheries and of runoff ondownstream water users are also factored in.Subsidy payments are excluded since they arenot farm income but, rather, transfer paymentsfrom taxpayers to farmers. Under this system,where everything relevant counts, the tradi-tional accounting method's $80-per-acre profitbecomes a $26-per-acre loss.

This study's findings advance WRI's ongoingresearch on the economic changes that arerequired to make "sustainable development" aglobal reality, not just a slogan. Its policyrecommendations complement and extendthose spelled out in Dr. Repetto's recentstudies, including Wasting Assets: NaturalResources in the National Income Accounts andPromoting Environmentally Sound Economic Prog-ress: What the North Can Do.

WRI would like to thank The Joyce Founda-tion and the Wallace Genetic Foundation, Inc.,for supporting the Nebraska and Pennsylvaniacase studies described in this report. The FordFoundation and The Rockefeller Foundationhave also provided essential support for ourwork on the economics of sustainable agricul-ture. To all these institutions, we express ourdeep appreciation.

Mohamed T. El-AshrySenior Vice PresidentWorld Resources Institute

vm

WORLD RESOURCES INSTITUTEPROJECT ON THE ECONOMICS OF SUSTAINABLE AGRICULTURE

ADVISORY PANEL

Ms. Beta BalagotAssistant Executive DirectorEnvironmental Management BureauDepartment of Environment and Natural ResourcesManila, The Philippines

Dr. Avishay BravermanDivision ChiefAgriculture and Rural DevelopmentThe World BankWashington, D.C.

Dr. Gunvant DesaiEconomistInternational Food Policy Research InstituteWashington, D.C.

Dr. Arturo Gomez-PompaDirectorUC MEXUSUniversity of CaliforniaRiverside, California

Dr. Martin HanrattyAgricultural EconomistTechnical Resources DivisionAsia/Near East BureauU.S. Agency for International Development

Dr. Liberty MhlangaGeneral ManagerAgricultural and Rural Development AuthorityHarare, Zimbabwe

Mr. Patrick O'BrienDirectorCommodity Economics DivisionEconomics Research ServiceU.S. Department of AgricultureWashington, D.C.

Dr. J. B. PennSpark's CommoditiesMcLean, Virginia

Mr. Robert RodaleRodale PressEmmaus, Pennsylvania

Mr. Marty StrangeCenter for Rural AffairsWalthill, Nebraska

Dr. Peter TimmerProfessorInstitute for International DevelopmentHarvard University

Dr. Bruce TolentinoDeputy Secretary of AgricultureDepartment of AgricultureManila, The Philippines

Dr. Vijay VyasInstitute of Development StudiesMangal Marg, JaipurIndia

rx

I. Overview, Policy Analysis andConclusions

A. Introduction

F or more than a half century, the U.S.government has used its many powersto support farmers' incomes. It has fixed

prices, set floor prices, supplemented marketprices, subsidized export sales, restricted com-peting imports, imposed limits on planting andmarketing, insured farmers against productionshortfalls, lent to farmers on favorable terms,and spent substantially from the public treas-ury on agricultural infrastructure, inputs, andresearch. Now, U.S. farm support programsuse all these instruments.

The United States is by no means alone inthis endeavor. Governments in WesternEurope and Japan, whether socialist or conser-vative, have defended their farmers from mar-ket forces even more staunchly. Since eachcountry's domestic farm policies affect itsagricultural export supplies and importdemands, usually to the detriment of compet-ing foreign producers, conflicting agriculturalpolicies create ceaseless international irritationand recrimination.

Farm programs have transferred income fromconsumers and taxpayers to farm producers,but at a heavy cost. Direct agricultural supportpayments in 1982-88 averaged 29 percent offarmers' incomes.1 Their direct fiscal cost toU.S. taxpayers approximates $12 billion a year.Their total cost over the last five years was $93billion (USDA, 1989). Higher prices and

restricted supplies cost U.S. consumers be-tween $5 billion and $10 billion a year inindirect or welfare costs (Carr et al., 1988;Bovard, 1989). The consumer- and taxpayer-costs of agricultural support in the world'sindustrial countries have been estimated at$150 billion annually (Carr et al., 1988).

Direct agricultural support payments in1982-88 averaged 29 percent of farmers'incomes. Their direct fiscal cost to U.S.taxpayers approximates $12 billion ayear. Their total cost over the last fiveyears was $93 billion.

Most of these income transfers have not goneto the small, low-income farmers. Instead,because commodity support programs linkbenefits to the acreage historically underproduction, the largest benefits go to thelargest producers. In 1988, the U.S. govern-ment's direct payments to farmers totalledabout $14.5 billion. Nine billion of this wentinto the pockets of farm businesses while therest went to those who own farmland andshare-lease it to farmers. Forty-two percent ofdirect payments went to just 60,000 farmerswho received an average payment of morethan $75,000. These farmers had average net

cash incomes of almost $100,000 and networths of nearly $750,000 (Schaffer and Whit-taker, 1990). Clearly, small farmers are not theprimary beneficiaries of these programs. Eventhough agricultural support programs arerationalized as protecting small farmers, agri-cultural production and land have becomemore concentrated, and the number of farmershas continued a long-term decline (NationalResearch Council, 1989).

As agricultural support programs have grownincreasingly complicated, so too has the web ofrestrictions and regulations governing what canbe planted, how and where it can be grown,and who can grow it. Farming has become oneof the country's most highly regulated indus-tries. Cropping patterns and practices havechanged, shifts in acreage have occurredamong regions and crops, and input use andtechnology have become more intensive inresponse to these federal requirements (USGAO, 1990; National Research Council, 1989;Runge, Munson, Lotterman and Creason,1990). Market interventions intended to transferresources to agriculture have distorted the eco-nomic allocation of resources within agriculture.

Moreover, many farm policies are inconsis-tent. To boost production, for example, govern-ment subsidizes irrigation, extension services,research, and infrastructure—but simultane-ously restricts cultivated acreage and pursuesother policies to cut overproduction.

U.S. agricultural policies also carry with themserious unintended environmental costs. This isamong the most pervasive and counterproduc-tive of policy inconsistencies. Farm supportscontribute to soil erosion, the overuse ofagricultural chemicals, and the loss of wildlifehabitat (Phipps and Reichelderfer, 1988; 1989).Policies that raise the payments farmers receivefor their crops, but restrict the acreage they canplant, encourage intensive cropping and inputuse on the land that is planted (Phipps andReichelderfer, 1988; National Research Council,1989). Contamination of underground and sur-facewaters by nitrates and pesticides has

emerged as a serious problem in many farmingregions (Hallberg, 1989; Kahn, 1987; NationalResearch Council, 1989), and a potential prob-lem in many others (Nielsen and Lee, 1987).

Specifically, commodity programs haveencouraged chemical-intensive monocultures,which deplete soil nutrients and polluteground- and surfacewater. Farmers' eligibilityfor payments under commodity support pro-grams is proportional to their established acre-age base, the average amount of land planted inthe preceding five years. Farmers are penalizedfor shifting acreage out of the supported cropbecause the acreage base (and government pay-ments) are lowered over the following fiveyears.

Deficiency payments are calculated for programcrops as a product of the base acreage, theestablished yield, and the difference betweenthe market price and the target price or loanrate, whichever is greater. When these defi-ciency payments rise as a percentage of themarket price, as they have recently, farmershave strong incentives to maintain the highestpossible base acreage. To take advantage ofthese incentives, farmers eliminate crop rota-tions that maintain soil fertility, control pests,and reduce erosion, and instead rely on chem-ical fertilizers and pesticides to maintain yields.In 1988, commodity support programs covered90 percent of acreage planted to corn (Mercier,1989), and 86 percent of acreage planted towheat (Harwood and Young, 1989), so the dis-incentives to resource-conserving farming prac-tices were extensive and powerful.

These disincentives are reinforced by othertypical features of agricultural support pro-grams. Until 1985, deficiency payments werebased on historical yields as well as base acre-age, which encouraged farmers to increaseyields even after their marginal productioncosts exceeded the expected market price.Since then, though the yield base has been fro-zen, cross-compliance provisions further dis-courage rotations by effectively prohibitingfarmers from shifting acreage from one

program crop to another without sacrificingdeficiency payments.

equivalent to 10 percent of net income fromfarming in 1986.

As U.S. agriculture has shifted from diversi-fied crop-livestock farms toward large, special-ized, input-intensive operations, soil erosionand chemical runoff have increased. Since1964, agricultural pesticide use in the UnitedStates has tripled and fertilizer use has risen bytwo-thirds, but cropland has expanded by only10 percent (Phipps and Reichelderfer, 1988).Rapid technological change and increasinginput use have masked the productivity costsof soil erosion on the farm. Off the farm,agriculture has become the largest diffuse, ornonpoint source of water pollution (Smith et al.,1987; National Research Council, 1989). Annualdamages to the rest of the economy fromwaterborne sediments exceed $10 billion a year,an estimated 36 percent of it from soil washedfrom croplands (Ribaudo, pers. comm.,7/10/90). Agriculture's share of these costs was

These trends work against the nation'sefforts to protect the environment and to con-serve agricultural resources through programssuch as the Soil Conservation Service and theConservation Reserve Program. The Food Secu-rity Act of 1985 attempted to counteract theseforces through conservation compliance regula-tions that denied commodity benefits tofarmers who converted wetlands or highlyerodible land to crop production. However,these provisions added another layer of regula-tion without altering the more fundamentalincentives imbedded in the structure of agricul-tural policies.

The Food, Agriculture, Conservation, andTrade Act of 1990 (U.S. House of Representa-tives, 1990) went further in establishing en-vironmental provisions than any previous Act,

Table 1. Annual Off-Site Damage from Soil Erosion

Damage Category

Freshwater recreationMarine recreationWater storageNavigationFloodingRoadside ditchesIrrigation ditchesFreshwater commercial fishingMarine commercial fishingMunicipal water treatmentMunicipal and industrial useSteam power cooling

Total

Source: Ribaudo, 1989

a. Costs updated from 1986 to 1990 dollars using a1990b, p. 19.

b. Best estimate is the most likely extent of off-site

Bestb

2,404692

1,260866

1,13061813669

4511,1141,382

28

10,150

multiplier

damage.

(U.S. $ Million)3

Range

955 -497 -756 -616 -755 -310 -68 -61 -

443 -573 -768 -24 -

5,826 -

7,5802,7721,7611,0781,787

92918496

6121,6551,848

39

20,341

of 1.157 derived from FAPRI,

adding provisions for an Integrated Farm Man-agement Program Option, pesticide record-keeping and sustainable agriculture, and waterquality research and education. The legislationalso increased farm flexibility and market orien-tation by removing 15 percent of a farmer'sbase acreage from eligibility. Despite these im-provements, the new legislation still maintainsthe distorting effect of commodity programs onmost farmland.

U.S. agricultural policies and those of itstrading partners could be redesigned to lowerthe fiscal, economic, and environmental costsof supporting farm incomes. Current agricul-tural policies in many countries distort com-modity prices, and in so doing, drive a wedgebetween what is financially optimal to farmersand what is economically most valuable to soci-ety. Agricultural policy could be restructured toremove this distortion, so that farmers pursu-ing their own best interest would choose whatis also better for society and the environment.

With this in mind, this report compares U.S.agricultural commodity support policies withalternative policy options. It is based on twocase studies in locations at opposite extremesof environmental sensitivity, Pennsylvania andNebraska. The Northeastern United States,including Pennsylvania, has the nation'shighest environmental off-farm costs per ton ofsoil erosion because rivers drain into denselypopulated coastal areas where the economicvalue of water and water-related activities ishigh. The Northern Plains region, includingNebraska, has the lowest off-site erosion costsbecause the value of erosion impacts are low.2

In Nebraska, on-site productivity losses asso-ciated with soil erosion are also lower becausesoils are deeper, less sloping, and thereforemuch less prone to erosion.

The framework developed for this study com-bines information from the field, farm, regionaland national levels to provide an integratedanalysis of the impacts of agricultural policy.

Table 2. Off-Site

Region

AppalachianCorn BeltDeltaLake StatesMountainNortheastNorthern PlainsPacificSoutheastSouthern Plains

Total

Source: Ribaudo,

a. Costs updated1990b, p. 19.

Damage per Ton of Soil Erosion, by Region

Gross Erosion(t/yr)

Millions

486967242181775187669679250490

4,926

1989

from 1986 to 1990 dollars using a multiplier

Best

1.631.332.824.321.298.160.662.872.222.33

2.06

of 1.157

Off-Site Damage($/t)a

Range

1.48 -0.65 -1.72 -2.30 -0.73 -4.85 -0.37 -1.76 -1.35 -1.33 -

1.19 -

2.612.369.406.921.99

16.252.925.493.124.50

4.13

derived from FAPRI

(See Figure 1.) The analytical methodology, anextension of natural resource accounting, wasdesigned to quantify economic, fiscal, andenvironmental costs and benefits of agriculturalpolicy options. The methodology can be usedto analyze the consequences of a wide range ofpolicy interventions, used alone or in combina-tion, including input subsidies, output pricesupplements, and acreage restrictions. More-over, it can be used to analyze the environ-mental costs of farm policies both in physicaland monetary terms, so that the benefits andcosts of alternative policies can be compared.This methodology is a useful tool for analyzingfarm policy options not only in the UnitedStates but in a wide variety of other settings aswell.

The methods of natural resource accountingprovide a relatively simple way to arrive atquantitative measures of sustainability. Soilproductivity, farm profitability, regional en-vironmental impacts, and government fiscalcosts can all be included within the naturalresource accounting framework.

The fundamental definition of income, themaximum consumption in the current periodthat does not reduce consumption in futureperiods, encompasses the notion of sustainabil-ity (Edwards and Bell, 1961; Hicks, 1946).Accounting systems for both businesses andnations have included a capital consumptionallowance, which is subtracted from net reve-nues in calculating income, and represents thedepreciation of capital during the current year.Historically, however, changes in productivecapacity of the natural resource base, which,like other forms of capital provides a flow ofeconomic benefits over time, have not beenincluded in these accounts. Only changes inman-made capital are included in accountingsystems, implying that the value of naturalresource capital is of negligible value in currentproduction systems. Nations, businesses, andfarmers account for the depreciation of assetssuch as buildings and tractors as they wear outor become obsolete, but ignore changes in theproductive capacity of natural resources such

as soil or water that result directly from theuse of the resource, or indirectly from second-ary impacts on the resource base from the pro-duction systems employed.

Thus, soil can be eroded, groundwater con-taminated, wildlife poisoned, and reservoirsfilled with sediment, all in order to supportcurrent agricultural practices and income. Nodepreciation allowance is currently appliedagainst that income for the degradation ofthese assets, even though future income levelsare jeopardized. Current accounting practicescan mask a decline in wealth as an increase inincome, i.e. "living off your capital."

For agriculture and other economic sectorsthat are fundamentally dependent upon thehealth of the natural resource base, the account-ing of natural resource capital is extraordinarilyimportant. When natural resources are notaccounted for in farm, research or policy deci-sions, it should not be surprising that currentagricultural production patterns may not be sus-tainable. In fact when changes in naturalresource assets are ignored, resource degrada-tion is encouraged, if not guaranteed.

This report rectifies key omissions in pastcomparisons of conventional and alternativepractices. Few previous studies compareprofitability under alternative policy scenarios,and none compare the economics of conven-tional and alternative production systems whennatural resources are accounted for.3

These are critical omissions: if naturalresource impacts are not compared, then theprimary justification for sustainable agriculturewill have been overlooked.

The core of the case studies reported here areeconomic comparisons between commonlyused conventional farming systems, which relyon heavy inputs of fertilizers and pesticides,and alternative systems, which rely on croprotations and tillage practices for soil fertilityand moisture and pest management. Thesecomparisons cover not only farmer's receipts

Figure 1. Integrated Analytical Framework Used to Develop Estimates of Net Farm Income andNet Economic Value

EPIC Model• Long-Term Crop Yields• Soil I-msion Estimates

SoilDepreciation

Estimates

Off-FarmDa mages

tUSDA Regional Soil

Erosion DamageEstimates(Ribaudo)

FAPRI Model• Commodity Prices

1I

Accounting Model• N'el Kirm Income

• Net Economic Value

Agronomic Databases• Rotations Characteristics

• Cost of Production• Crop Yields• Input Use

and production costs but also selected on- andoff-farm resource and environmental costs.

Estimates of environmental costs are basedon detailed physical, agronomic, and economicmodeling of soil, water, and chemical transportfrom field into ground- and surfacewaters andthe implications of these processes for waterquality and soil fertility. Data from nine yearsof field experiments at the Rodale ResearchCenter in Kutztown, Pennsylvania, and at theUniversity of Nebraska at Mead were analyzedusing the U.S. Department of Agriculture(USDA) Erosion-Productivity Impact Calculator(EPIC) Model (Williams et al., 1989). Outputfrom this model was used to estimate the on-

and off-farm soil costs associated with conven-tional and alternative crop rotations. Otherproblems associated with agricultural produc-tion, such as groundwater contamination, lossof wildlife habitat, soil salinization or toxicsbuild-up, and human health problems due tothe use of toxics, though significant, were notaddressed in this study. Hydrological modelsrequired for the examination of groundwatercontamination issues, for example, are inade-quate, so economic losses associated withgroundwater quality cannot be determined.

Additionally, because of the nature of the casestudy approach, large-scale trade-offs in surface-water quality, soil erosion and groundwater

quality could not be explored. Large benefits inone area may be offset by costs in anotherbecause of the possibility of widespread landuse changes (Hrubovcak et al., 1990). Crutch-field (1988) has estimated changes in nitrogenin surface runoff and leachate for a variety ofdifferent soil conservation practices. Some ofthese results show that even though total nitro-gen losses may be reduced, some practices canincrease the percentage of nitrogen leached.For example, the establishment of a permanentvegetative cover reduces nitrogen in surfacerunoff by 90 percent, but increases nitrogen inleachate by 26 percent.

In both case studies, each policy option ismodeled to represent its constraints on andincentives to farmers. For example, the implica-tions of different cropping patterns on farmers'base acreage and government support paymentreceipts are built into each analysis. Both thefinancial and economic value of each policyoption are analyzed. The financial value (NetFarm Income) of a production program tofarmers takes into account current and futuretransfer receipts but ignores environmentalcosts borne by others. By contrast, the sameprogram's economic value to society (Net Eco-nomic Value) includes environmental costs butignores transfer payments. Because the mostfinancially rewarding production system tofarmers may not generate the greatest eco-nomic value, some policy options may inducesignificant economic losses.

Nationwide, responses by individual farmersto shifts in agricultural policy strongly influenceaggregate supplies of crops and market prices.In turn, changes in market prices stronglyinfluence farmers' production decisions. Com-modity price projections from agricultural sec-torwide econometric models developed by theFood and Agricultural Policy Research Institute(FAPRI) have been used here to estimate themarket prices that each policy option wouldgenerate (FAPRI, 1988; 1990a). In turn, thesepredicted prices were used in the farm-levelcase studies. Geographically specific case stud-ies were needed to analyze policy consequences

because of regional differences in soils, weather,population densities and levels of economicactivity that lead to different regional responsesto the same national policies. In this way, bylinking aggregative models of the effects ofdifferent national policies on farm prices tofarm-level analyses of production decisions,both economic and environmental consequencescould be predicted.

Baseline policy, as represented by the FoodSecurity Act of 1985 (FSA), is the point ofdeparture for both case studies. Under FSAcommodity programs (for wheat, corn, oats,sorghum, rye, barley, cotton, and rice), par-ticipating farmers may receive deficiency pay-ments on their base acreage enrolled in theprogram. Base acreage is defined as the averageacreage planted to the commodity in the pastfive years. On this base acreage, less a manda-tory set aside, deficiency payments per unit ofoutput are based on historical yields, frozen inthe FSA to 1981-85 average levels, excludingthe highest and lowest. Then, deficiency pay-ments per unit of production are calculated asthe difference between the target price and themarket price or the crop loan price, whicheveris higher. Participating farmers are also pro-hibited from planting any program crop forwhich they have no base or planting acreage inexcess of the established base.

An alternative to the FSA commodity sup-port programs, and the economic baseline forboth case studies, can be described as multi-lateral decoupling (MLDC). This policy scenarioapproximates the goals of the U.S. governmentin the Uruguay Round of trade negotiationsamong participating countries in the GeneralAgreement on Tariffs and Trade (GATT)(Ambur, 1988). The scenario assumes that allmajor trading countries eliminate both importrestrictions and export subsidies on agriculturalproducts. It assumes further that governmentincome support payments are made directly totargeted farmers in ways that do not dependon production levels or decisions, so that bor-der prices in all countries are transmitteddirectly to domestic markets (FAPRI, 1988).

This alternative is a radical departure from theagricultural policies that industrial countrieshave followed since World War II. It representsthe economic baseline because it eliminates thedistortion of resource use in agriculture undergovernment market interventions, and insteadlets real cost advantages determine national andregional production patterns. Farmers' profit-maximizing choices of production methods areneither constrained by supply restrictions norinfluenced by distorted price relationships. Theprices that would emerge under this policyoption permit the most accurate economic com-parisons of competing production technologies.

Other policy options require less extensivemodifications in the structure of the commodityprograms to widen farmers' flexibility for mak-ing production decisions. One such option wasintroduced as a legislative proposal in 1989,H.R. 3552, the Sustainable Agriculture Adjust-ment Act of 1989 (SAAA) (U.S. House ofRepresentatives, 1989) and passed in similarform as the Integrated Farm Management Pro-gram Option in the Food, Agriculture, Conser-vation, and Trade Act of 1990 (U.S. House ofRepresentatives, 1990). Also known as the JontzBill, the proposal is designed to enable farmersto adopt "resource-conserving crop rotations"without sacrificing commodity support benefits.

Under this bill, resource-conserving croprotations are defined as crop rotations thatreduce erosion and chemical use by alternatingplantings of "legumes, legume-grass mixtures,legume-small grain mixtures, and legume-grass-small grain mixtures" (not including bar-ley or wheat for human consumption). Forrotations that qualify:

1. The acreage set-aside requirement can bewaived if production of supported crops isreduced over the rotation by an amountequal to historical yields on set-asideacreage.

2. Cross-compliance provisions are waived sothat other program crops can be includedin the rotations.

3. Acreage planted to resource-conservingcrops is included in calculating base acre-ages so that participating farmers whoadopt resource-conserving crop rotationsare not penalized by reductions in baseacreages and future deficiency payments.

While the SAAA option was intended to beavailable to a limited number of farmers, andin fact passed with a sign-up limit of 3 to 5million acres over five years, we have testedthe program as if it were available to allfarmers.

Another policy option modeled in the casestudies resembles the Normal Crop Acreage(NCA) proposal introduced by the Bushadministration (USDA, 1990). This option, too,was designed to increase planting flexibility forparticipating farmers in government programs.In this proposal, normal crop acreage is definedas the sum of a farm's acreage bases for eachprogram crop plus historical plantings of oil-seeds. Acreage reduction requirements andacreage eligibility limits in baseline policy stillapply, except that any program crop or oil-seeds may be planted on acreage not set asidewithout a reduction in base acreage and defi-ciency payments. Resource-conserving crops,however, may be planted but not harvestedunless the producer forgoes deficiency pay-ments on the harvested acres (USDA, 1990).

A final policy option is designed to addressthe off-site environmental costs of farm produc-tion, a 25-percent tax on chemical inputs, based onthe "polluter pays" principle. Under this sce-nario, baseline policy remains intact but fer-tilizer and pesticide costs are 25 percent higher.Analytically, the question is whether farmerswould be more likely to adopt alternative agri-cultural production technologies if forced tobear the environmental costs that conventionalpractices foist on others. (The principal featuresof these policy alternatives are summarized inTable 3.)

A resource-accounting framework is appliedin this report to regional case studies in Penn-

Table 3. Principal Features of Policy Options Tested

Baseline Policy

Sustainable Agriculture AdjustmentAct of 1989(H.R. 3552) (SAAA)

Normal Crop Acreage

Input Tax of 25 Percent

Multilateral Decoupling

Continuation of 1985 Food Security Act

Farmers using resource-conserving rotations allowed 100percent planting flexibility, maintenance of crop baseacreages, waiver of crop set-aside acreage, and pay-ments on forage crops

100 percent planting flexibility, but no deficiency pay-ment for nonprogram crops if harvested

25 percent tax applied to inorganic fertilizers andpesticides

Elimination by U.S., EC, Japan, etc., of all commodityprograms tied to production

sylvania and Nebraska. Both case studies com-pare the conventional and alternative agriculturalproduction methods used for more than nineyears when data on yields, production costs,chemical use, and changes in soil conditions weremonitored in the field. These data were gener-ated through cropping system research at the

Rodale Research Center and at the University ofNebraska and were analyzed in collaborationwith scientists at those institutions. Net farmincome and net economic value generated undervarious rotations were estimated under farm pro-grams as stipulated in the 1985 Food Security Actand under various alternative policies.

:

Rotations Compared, Pennsylvania t

Pennsylvania—Five-Year RotationsCCCCBCB

ACG

ACGF

ALLHAY

Nebraska-CC

Continuous conventional cornConventional corn-soybeanrotationAlternative cash grain, corn-barley/soybean-wheat/clover-corn-soybeanAlternative cash grain with fodderproduction corn-soybean-wheat/clover-clover-corn silageContinuous alfalfa production

—Four-Year RotationsConventional continuous cornwith herbicide and inorganic fer-tilizer use

HFCB

FOCB

ORGCB

HFROT

FOROT

ORGROT

md Nebraska

Conventional corn-soybean rota-tion with herbicide and inorganicfertilizer useCorn-soybean rotation with inor-ganic fertilizer use onlyCorn-soybean rotation with noherbicide or inorganic fertilizeruse, manure applied during thecorn yearInorganic herbicides and fertilizer,corn-soybean-corn-oat/cloverInorganic fertilizer but no herbicides,corn-soybean-corn-oats/cloverOrganic rotation with manure ap-plication, corn-soybean-corn-oats/clover

Estimating resource costs. Estimates of soil run-off in the Pennsylvania and Nebraska sitesfrom the EPIC model were linked to USDAfigures on water pollution damage costs perton of soil erosion in each region. Thesedamage-cost estimates include losses to fisher-ies, industries, recreation, and other water uses(Ribaudo, 1989).

Tables 4 and 5 show estimated soil erosionrates, off-farm erosion costs, and the value ofsoil productivity changes for each rotation inthe Pennsylvania and Nebraska cases. The off-farm erosion costs for the rotations areweighted according to the set-aside require-ments. If, for example, 10 percent of the landmust be taken out of production, the set-asideland is presumed to be planted in hay, whichhas a much lower erosion rate, and the averageerosion rate is weighted accordingly. (SeeAppendix A for an example of the method ofcalculation.)

In Pennsylvania, soils are shallow and slop-ing, and surfacewaters drain into denselypopulated eastern cities with high waterdemands. On- and off-site resource costs arehigh, and the difference in resource costsbetween conventional and alternative rotationssignificantly affects both economic and financialcomparisons. Soil quality is such that two dis-tinct production phases are evident in the fieldtrials: 1. a four-year transition period, whenorganic rotations yield less than conventionalyields following a switch from inorganic fer-tilizers and pesticides, and 2. a subsequentnormal period, when the alternative yieldsequal or exceed the conventional yields.

B. Principal Findings

The study generated two sets of findings:one concerning production systems, the otherconcerning policy options.

Table 4. Rotation Characteristics,

Tillage/Rotation

Conventional Tillage

Continuous CornCorn-BeansAlternative Cash Grain (ACG)ACG w/FodderAll Hay

Reduced Tillage

Continuous CornCorn-BeansAlternative Cash GrainACG w/Fodder

a. Estimated using a damage costthese costs were calculated.

b. Parentheses indicate appreciatiot

Pennsylvania, under

SoilErosion(t/ac/yr)

9.266.074.253.290.66

7.155.293.492.49

of $8.16 per ton. See

i in soil productivity.

Baseline Policy

Off-FarmErosion Costa

($/ac/yr)

694732265

53412720

Appendix A for an

SoilDepreciation

($/ac/yr)

24.824.6(2.8)b

(8.4)(4.8)

24.423.8(3.6)

(10.2)

explanation of how

10

Table 5. Rotation Characteristics,

Tillage/Rotation

Continuous Corn

Corn-Beansw/Herbicides & Fertilizerw/Fertilizer onlyw/Organic treatment

Corn-Beans-Corn-Oats/Cloverw/Herbicides & Fertilizerw/Fertilizer onlyw/Organic treatment

Nebraska, under

SoilErosion(t/ac/yr)

6.5

3.73.73.1

3.13.12.2

Baseline Policy

Off-FarmErosion Cost

($/ac/yr)

4.0

2.32.32.0

2.02.01.5

SoilDepreciation

($/ac/yr)

7.8

3.02.8

(2.0)

(1.3)(1.0)(4.0)

In Pennsylvania, where on-farm andoff-farm environmental costs arerelatively high, organic farmingrotations are clearly superior toconventional, chemical-intensive, cornand corn-soybean production—agronomically, environmentally, andeconomically.

Alternative Production Systems. In Pennsyl-vania, where on-farm and off-farm environ-mental costs are relatively high, organic farmingrotations are clearly superior to conventional,chemical-intensive, corn and corn-soybeanproduction—agronomically, environmentally,and economically. Resource-conserving prac-tices cut production costs by 25 percent, elimi-nated inorganic fertilizer and pesticide use,reduced soil erosion by more than 50 percent,and increased yields after the transition from

conventional systems had been completed. (SeePart II for details.)

By reducing soil erosion and improving waterretention, farmers using these practices wouldreduce off-site damages by more than $30 anacre. They would also forestall a 30-yearincome loss with a present worth of $124 anacre by building soil productivity by 2 percentand preventing a 17 percent decline in soilproductivity. Consequently, when all resourcecosts associated with soil erosion are included,resource-conserving farming outperforms con-ventional approaches by almost a two-to-onemargin in net economic value per acre. (SeeTables 26 and 27, and Figures 2 through 7.)

In Nebraska, where on-farm and off-farmenvironmental costs are relatively low, alterna-tives to the predominant, high-input, corn-beanrotation were found to be environmentallysuperior and economically competitive. Threedifferent treatments for the corn-soybean rota-tion differed in net farm income and net eco-nomic value by no more than $2 per acre peryear. These treatments were a conventionaltreatment that relied on herbicides andinorganic nitrogen and phosphorous; a mixed

11

treatment that used inorganic fertilizer but noherbicides; and an organic treatment that reliedon biological means of fertility maintenanceand pest control, without any agrichemicals.The underlying financial calculations excludedany premia for organically produced crops inthe analysis of net farm income, although intoday's marketplace some organically growncommodities command a 10-20 percentpremium. The same output prices were used inboth case studies for all crops and all treat-ments, because if organic methods were usedwidely enough, the premia could be expectedto diminish or disappear altogether. If the cur-rent premia were included, however, the netfarm income for the organic corn-bean treat-ment would be 21 percent greater than for theagrichemical treatments.

In Nebraska, where on-farm and off-farm environmental costs are relativelylow, alternatives to the predominant,high-input, corn-bean rotation werefound to be environmentally superiorand economically competitive.

The organic corn-bean treatment was com-petitive financially and economically, andsuperior environmentally. It reduced soil ero-sion 20 percent compared to the chemical-intensive corn-bean rotation, and 50 percentcompared to continuous corn. Total environ-mental costs associated with soil erosion werelower by $5 per acre per year.

While alternative treatments of the corn-beanrotation performed well in financial and eco-nomic terms, alternatives to that rotation didpoorly. Compared to a conventional corn-soybean rotation, an organic corn-soybean-corn-oats/clover rotation cut soil erosion by 40percent and eliminated chemical fertilizers and

pesticides. The resultant savings in on-farmand off-farm environmental costs associatedwith soil erosion amounted to 15 percent of thegross operating margin. Though respectable,these savings failed to offset a yield disadvan-tage of 13 percent for corn and 8 percent forsoybeans relative to the best conventional rota-tion. Moreover, oats generate less revenue thansoybeans, and are a poor substitute financially.All three treatments of the conventional corn-soybean rotation thus outperformed all threetreatments of the four-year alternative rotationby an average of 31 percent in terms of neteconomic value per acre under baseline policy.(See Figures 8, 9, and 10 and Table 28.)

These findings suggest that resource-conserv-ing production systems will be economicallysuperior for many farmers wherever off-siteenvironmental damages are substantial andsoils are vulnerable to productivity lossthrough erosion. Even where soils are robustand environmental risks are minimal, alterna-tive treatments, relying upon biological produc-tion methods, could be financially and econom-ically competitive.

Policy Alternatives

In both case studies, a policy of multilateraldecoupling produces the greatest net economicvalue of any of the policy alternatives consid-ered. Moreover, most U.S. farmers would dowell financially if these policies were adoptedmultilaterally. Opening markets and reducingsupplies from high-cost producers would meanhigher crop prices, and ending program con-straints would let farmers reallocate theirresources more efficiently. Net farm operatingincome before government commodity pay-ments would be uniformly higher in bothregions under multilateral decoupling, becausemarket prices could be expected to increaseand farmers would receive undistorted marketsignals. (See Figures 4, 7 and 10.) For the differ-ent rotations and treatments, net farm operat-ing incomes improve by a wide range: 22 to224 percent in Pennsylvania and 16 to 203 per-cent in Nebraska. This conveys the important

12

policy and budgetary lesson that if agriculturalsubsidies were targeted and delivered in lessdistorting ways, the fiscal costs of farm incomesupport programs could be drastically reduced.

/ / agricultural subsidies were targetedand delivered in less distorting ways,the fiscal costs of farm income supportprograms could he drastically reduced.

Tables 6 and 7 show how a move to multi-lateral decoupling increases net economicvalue. In both cases, multilateral decouplingresults in a higher net economic value for allrotations and treatments. In Pennsylvania inparticular, significantly higher net economicvalues could be obtained by a movement awayfrom conventional, to alternative rotations. Inthe normal period the net economic values ofthe alternative rotations are more than doublethat for conventional corn-beans.

For Nebraska, multilateral decoupling pro-duces higher net economic values for all rota-tions but the corn-beans rotations are economi-cally superior.

In Pennsylvania, where resource costs arehigh, farmers who take a long view (ten years)and respond to market signals would findresource-conserving rotations much moreprofitable than other farming systems underevery policy scenario we tested. In addition,net farm operating income for all rotations issignificantly higher under multilateral decou-pling than under the other policy scenarios.Consequently, government subsidies could begreatly reduced with no loss of farm income.

Tables 8 and 9 show the fiscal savings possi-ble from a move to multilateral decoupling.The tables show the income support requiredto achieve parity with the most profitable

conventional rotation under baseline policy, thebenchmark for comparisons. These calculationswere done assuming conventional financialaccounting, excluding soil depreciationallowances.

Table 8, for Pennsylvania, is broken out forthe transition period, the full ten-year analysis,and the normal period alone. During the tran-sition period, the conventional corn-beans rota-tion in Pennsylvania is within $4 over fiveyears of the net farm income under baselinepolicy. Thus, only a $4 direct income supportpayment is necessary to achieve parity.Because of the reduced crop yields during thetransition period, the alternative rotationsrequire income support payments which arehigher by $58 and $78 over five years thanthose for the benchmark.

However, during the normal period, whencrop yields are roughly equal to the yields forconventional practices (see Figures 12 and 14), nodirect income support is required for the alter-native cash grain rotation and only $42 for thealternative cash grain with fodder rotation.These result in savings of $152 and $110 overfive years, relative to the benchmark. Undermultilateral decoupling the corn-beans rotationalso requires no payment for parity and evenfor continuous corn, payments are lower by $26relative to corn-beans under baseline policy.

In Nebraska, the three treatments of thecorn-beans rotation would require much lowerlevels of government support to achieve parity,while the continuous corn and four-year rota-tions would require higher levels of govern-ment support.

Taken together, these results clearly show thatgovernment costs can be reduced and the eco-nomic value of agricultural production to societycan be greatly increased by removing the dis-torting effects of baseline policy and encourag-ing farmers to respond to market signals.

However, society may need to help farmersfinancially to get them through the transition

13

Table 6. Increase in Net Economic Value Possible From a Move to Multilateral Decoupling8

PennsylvaniaNet Economic Value (NEV) and Increase in Net Economic Value

CCConventional Tillage

CCBCB ACG ACGF CCReduced Tillage

CCBCB ACG ACGF

Transition Period($/acre/5 years)

Baseline NEV (575) (132) (88) 5 (510) (112) (58) 41MLDC NEV (307) 19 10 55 (233) 40 43 92Increase (175) 151 142 187 (101) 172 175 224

Transition Plus Normal Period($/acre/10 years)

Baseline NEV (919) (61) 208 345 (796) (23) 264 413MLDC NEV (359) 251 438 466 (222) 290 500 536Increase (298) 312 499 527 (161) 351 561 597

Normal Period($/acre/5 years)

Baseline NEVMLDC NEVIncrease

(344)(52)

(123)

71232161

296428357

340411340

(286)11

(60)

89250179

322457386

372444373

CC - Conventional continuous cornCCBCB - Conventional corn-beansACG - Alternative Cash Grain—Organic corn-barley/soybean-wheat/clover-corn-soybeansACGF - Alternative Cash Grain w/Fodder—Organic corn-beans-wheat/clover-clover-corn

silage

MLDC - Multilateral Decoupling

a. Increases (or decreases) in Net Economic Value for each rotation are based on the mostprofitable conventional rotation—the corn-beans rotation (CCBCB)—under baseline policy.The table shows the result of a movement from CCBCB under baseline policy to the givenrotation under multilateral decoupling.

(MLDC NEVROTATION - Baseline NEVC C B CB = IncreaseR0TATI0N)These calculations assume output prices as in Table 4 for Multilateral Decoupling.

b. Normal period values have been discounted.

14

Baseline NEVMLDC NEVIncrease

CC

72250

(233)

HFCB

480561

78

FOCB

483561

78

ORGCB

474553

70

HFROT

348458(25)

FOROT

344449(34)

ORGROT

340445(38)

Table 7. Increase in Net Economic Value Possible From a Move to Multilateral Decoupling8

NebraskaNet Economic Value and Change in Net Economic Value

($/acre/4 years)

CCHFCBFOCBORGCBHFROTFOROTORGROT

Conventional continuous cornConventional corn-beans, w/herbicides and fertilizerCorn-beans w/fertilizer but no herbicidesOrganic corn-beansCorn-beans-corn-oats/clover w/herbicides and fertilizerCorn-beans-corn-oats/clover w/fertilizer but no herbicidesOrganic corn-beans-corn-oats/clover


a. Increases (or decreases) in Net Economic Value for each rotation are based on the mostprofitable conventional rotation—the fertilizer-only corn-beans rotation (FOCB)—under base-line policy. The table shows the result of a movement from FOCB under baseline policy tothe given rotation under multilateral decoupling.

(MLDC NEVROTATION - Baseline NEVFOCB = IncreaseR0TATION)These calculations assume output prices as in Table 4 for Multilateral Decoupling.

period, but, this would be a wise investment.Tables 6 and 8, for example, show that a pay-ment of just $12 per acre per year higher thanthat for the conventional corn-beans rotationunder baseline policy, would in five yearsresult in a fiscal savings of $30 per acre peryear and an increase in net economic value of$72 per acre per year. These numbers make acompelling argument for a change in baselinepolicy.

By contrast, baseline policy offers the highestfinancial support per acre to farms using thehigh resource-cost rotations and heavy agri-chemical input levels. Table 10 shows that inboth Pennsylvania and Nebraska, under base-line policy, the continuous corn rotation drawsthe highest per acre deficiency payment, has

the highest on- and off-farm resource cost, andhas the highest use of fertilizers and pesticides;alternative rotations relying upon biological fer-tility and pest management have the lowestresource costs but receive much less govern-ment support.

Baseline policy is so biased in favor of resource-degrading practices that, despite their long-termeconomic inferiority, even in Pennsylvania,farmers unable or unwilling to look beyond thetransition period would continue to plant con-ventional corn-soybean rotations. Because highgovernment support payments make conven-tional practices most profitable for farmers inthe short run, baseline farm policies blockresource-conserving alternatives even in regionswhere they are much superior economically.

15

Table 8. Fiscal Savings Possible From a Move to Multilateral Decoupling8

PennsylvaniaGovernment Payments and Savings

Conventional TillageCC CCBCB ACG ACGF

Reduced TillageCC CCBCB ACG ACGF

Transition Period($/acre/5 years)

Baseline Payment 293 176 182 123 293 176 182 123MLDC Payment 178 4 234 254 193 17 237 258Savings (2) 172 (58) (78) (17) 159 (61) (82)

Transition Plus Normal Period($/acre/10 years)

Baseline Payment 547 328 315 192 547 328 315 192MLDC Payment 304 4 234 296 332 17 237 303Savings 24 324 94 32 (4) 311 91 25

Normal Period($/acre/5 years)

Baseline Payment 254 152 133 69 254 152 133 69MLDC Payment 126 0 0 42 139 0 0 45Savings 26 152 152 110 13 152 152 107

CC - Conventional continuous cornCCBCB - Conventional corn-beansACG - Alternative Cash Grain—Organic corn-barley/soybean-wheat/clover-corn-soybeanACGF - Alternative Cash Grain w/Fodder—Organic corn-beans-wheat/clover-clover-corn

silage


a. Calculations are based upon the direct income support required for each rotation to achieveparity with the most profitable conventional rotation—the corn-beans rotation (CCBCB)—under baseline policy and using conventional financial accounting.

(Baseline PaymentCCBCB - MLDC PaymentROTAT1ON = SavingsROTATION)These calculations assume output prices as in Table 4 for Multilateral Decoupling.

b. Normal period values have been discounted.

16

Table 9. Fiscal Savings Possible From a Move to Multilateral Decoupling8

NebraskaGovernment Payments and Savings

($/acre/4 years)

CC HFCB FOCB ORGCB HFROT FOROT ORGROT

Baseline Payment 199 100 100 100 100 100 100MLDC Payment 286 8 10 41 131 140 155Savings (186) 92 90 59 (31) (60) (55)

CC - Conventional continuous cornHFCB - Conventional corn-beans, w/herbicides and fertilizerFOCB - Corn-beans w/fertilizer but no herbicidesORGCB - Organic corn-beansHFROT - Corn-beans-corn-oats/clover w/herbicides and fertilizerFOROT - Corn-beans-corn-oats/clover w/fertilizer but no herbicidesORGROT - Organic corn-beans-corn-oats/clover


a. Calculations are based upon the direct income support required for each rotation to achieveparity with the most profitable conventional rotation—the fertilizer-only corn-beans rotation(FOCB)—under baseline policy and using conventional financial accounting.

(Baseline PaymentFOCB - MLDC PaymentROTAT1ON = SavingsROTATioN)These conditions assume output prices as in Table 4 for Multilateral Decoupling.

Because high government supportpayments make conventional practicesmost profitable for farmers in the shortrun, baseline farm policies blockresource-conserving alternatives even inregions where they are much superioreconomically.

As an interim policy modification, or perhapsas a means to see farmers through the transi-tion period, provisions that increase farmers'planting flexibility without decreasing their

support payments would greatly improve thenet farm income from alternative rotations rela-tive to conventional rotations. The SustainableAgriculture Adjustment Act, for example,would remove the bias in baseline commodityprograms toward intensive monocultures. Thislegislation is significant because it substantiallyimproves the financial results of the alternativerotations during the transition period. Thismight induce farmers in Pennsylvania to switchto the ecologically and economically preferablealternative rotations. (See Table 27 and Figures 5,6 and 7.)

In Nebraska, the four-year rotations, sub-stituting a year of oats and clover for soybeans,also improve under SAAA to within 4 percentof the net farm income for the corn-beans rota-tions. Under baseline policy this gap is 23 per-

17

Table 10. Government Deficiency

Rotation

Continuous CornCorn-Beans

w/Herbicide & Fertilizerw/Fertilizer onlyw/Organic treatment

Corn-Beans-Corn-Oats/Cloverw/Inorganic inputsw/Fertilizer onlyw/Organic treatment

Continuous CornCorn-BeansCorn-Barley/Beans-Wheat/

Clover-Corn-BeansCorn-Beans-Wheat/Clover-

Clover-Corn SilageContinuous Alfalfa

Payments, Resource Costs

Deficiency Payment($/ac/yr)

Nebraska

50

252525

252525

Pennsylvania

5935

36

250

a. Both soil depreciation and off-farm costs are included. See

and Nitrogen Use

Resource Costsa

($/ac/yr)

12

550

11

(2)

9372

29

171

Tables 4 and 5.

Nitrogen Use(lbs/ac/yr)

85

3838

0

4144

0

15075

0

00

cent. The organic corn-soybean rotation doesnot qualify under SAAA. (See Table 28 andFigures 8, 9 and 10.)

The Normal Crop Acreage program wasdesigned on similar principles but givesfarmers less flexibility than SAAA. NCAdoesn't alter the relative economics of variousrotations in Pennsylvania or in Nebraska.Moreover, removing farmers' option to takeland out of production depresses prices. NCA'slimited flexibility precludes extensive rationali-zation of resource use in agriculture, andreduces economic value below that achievableunder either of the two preceding policyoptions.

As might be expected, a 25 percent input taxsignificantly discourages chemical use withinany cropping pattern. A 25 percent agrichemi-cal tax reduces the profits of chemical-usingrotations, in which agrichemicals account for 15to 30 percent of total production costs, relativeto biological fertility and pest managementalternatives. In the Nebraskan corn-beans rota-tion, for example, the tax makes the herbicideand fertilizer-intensive corn-beans treatmentthe least profitable of the three corn-beanstreatments and virtually equalizes returnsbetween the organic and the fertilizer-onlytreatments. It would only take a 12 percentpesticide and fertilizer tax to equalize net farmincome for the herbicide and fertilizer-intensive

18

Figure 2. Net Economic Value, Pennsylvania Case Study, Full 10-Year Period UsingConventional Tillage

-1001' _

9 Multilateral Decoupling

S Baseline Policy

LJ 25% Agrichemical Input Tax

C] Sustainable Agricultural Adjustment Ail

LJ Normal Crop Acri-age I'lan

-1201 •

Continuous Corn

Source: World Resources Institute

Corn-Beans AlternativeCash Grain

AlternativeCash Grain

With Fodder

corn-beans treatment and the organic corn-beans treatment, in Nebraska.

C. Conclusions andRecommendations

Even under the Food, Agriculture, Conserva-tion, and Trade Act of 1990 (U.S. House ofRepresentatives, 1990) the commodity pro-grams that form the core of current agriculturalpolicy, though somewhat reduced, remain basi-cally intact. Despite provisions in the lawrequiring conservation compliance, farmers stillhave strong financial incentives to plant just afew crops and use energy-intensive chemicalmeans of fertility maintenance and pest control.

Commodity programs (except the limitedIntegrated Farm Management Program Option)penalize farmers who diversify their croppingpatterns. This discourages biological means offertility maintenance and pest control. Onlywhen commodity programs are restructured togive stronger financial incentives to economical,resource-conserving farming practices willAmerican agriculture become sustainable.

Farm policy, as it now stands, inducesfarmers to ignore resource costs. Neitherfarmers nor taxpayers will benefit from this sit-uation over the long haul. Farm policy shouldtherefore be reconstructed to give all farmersfinancial incentives for conservation and wiseresource use. The 1990 Act, while it moved in

19

Figure 3. Net Farm Income, Pennsylvania Case Study, Full 10-Year Period Using Conventional Tillage

o

Continuous Corn


Corn-Beans

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1000_

800_

600 _

400_

200_

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With Fodder

this direction, passed up opportunities to dothis.

New policies can dramatically lower theresource costs of U.S. farming, while raisingagricultural productivity and lowering the fiscalburden of supporting farm incomes. In oneway or another, any successful policy willencourage farmers to recognize and cutresource costs by adopting alternative practiceslike those tested—and proven—in Pennsylvaniaand Nebraska.

Multilateral decoupling provides the greatestnet economic value of the policies we tested.The simple fact that income support is not tiedto commodity production allows market signalsto reach farmers, encouraging them to usetheir resources in ways that are inherently

more efficient. In areas with high resourcecosts, farmers who take a long view wouldlikely shift to resource-conserving rotations,while in regions with low resource costs,farmers would shift to less chemical-intensivepractices.

The GATT negotiations now under way inGeneva provide an excellent opportunity tomove toward this policy orientation in stepwith Europe and Japan, which also sufferheavy economic, fiscal, and ecological lossesbecause of the present situation. Fortunately,the current U.S. administration has stronglyadopted less distorted agricultural trade as anegotiating position. It deserves the support ofAmerican taxpayers, farmers, and environmen-talists, who should recognize that they allwould benefit if the U.S. negotiating position

20

Figure 4. Net Farm Operating Income*, Pennsylvania Case Study, Full 10-Year Period UsingConventional Tillage

600.

>•o

oD

-200.

-400.

-600.

Multilateral Decoupling

B Baseline Policy

LJ 25'* Agrichemical Input Tax

I I Sustainable Agricultural Adjustment Act

I I Normal Crop Acreage Clan

Continuous Corn Corn-Beans

*Net Farm Income Before Subsidies




With Fodder

prevails. Environmentalists in particular shouldrecognize that the answer to agriculture'senvironmental problems is not to tie on moreregulations and cross-compliance provisionsbut to make the fundamental incentivesfarmers face consistent with the true values ofthe production systems available to them.

Unfortunately, because decoupling proposalshave been associated with the elimination offarm income support, they have been highlyunpopular among many farm groups. In real-ity, decoupling is an opportunity to increasethe competitiveness of U.S. agriculture and itssocial value, to support income objectivesdirectly in rural America, and to reduceenvironmental harm from farming. Previousrounds of GATT negotiations have stumbled

The answer to agriculture'senvironmental problems is not to tie onmore regulations and cross-complianceprovisions but to make the fundamentalincentives farmers face consistent withthe true values of the productionsystems available to them.

over agricultural protectionism as has the cur-rent round. Perhaps if it became clear that farmincomes could be protected at much lower fiscal

21

Figure 5. Net Economic Value, Pennsylvania Case Study, Transition Period UsingConventional Tillage

-700

Continuous Corn Corn-Beans


H Multilateral DecouplingB Baseline Policyl~l 25'i Agrichemical Input TaxI I Sustainable Agricultural Adjustment ActLJ Normal Crop Acreage Plan

AlternatiyeCash Grain


With Fodder

cost, that markets could be expanded, and thatenvironmental damages could be reduced aswell, it would be possible to achieve somecommon ground.

Farm income could be maintained at alower fiscal cost by a movement tofreer trade.

The United States government spends $12billion every year on direct agricultural sup-port, mainly through commodity programs.The analysis presented here suggests that farm

income could be maintained at a lower fiscalcost by a movement to freer trade. Because ofthe current budget deficit, along with otherreasons, these potential fiscal savings justifyserious consideration of decoupling proposals.There could be significant savings, yet stillenough money to restructure farm supportaway from convoluted commodity programsand into direct assistance to farmers and com-munities that most need it and whose resourcemanagement practices and environmental ser-vices warrant it.

This study also points to the need for signifi-cant reorientation in federally sponsoredagricultural research programs. Not only hasfederally sponsored research into alternativefarming methods been badly shortchanged, thecriteria used to evaluate those methods in

22

Figure 6. Net Farm Income, Pennsylvania Case Study, Transition Period Using Conventional Tillage

I

E Multil.iU'r.il Occouplini;

EH Baseline I'ulicv

500-

400.

300.

200 J

100 J

J 2V, Agridieniic.il InputT.i\

L_l Sustainable Agrimlturjl Adjustment Acti ' Normal Crop Acreage Plan

1-100

IContinuous Corn Corn-Beans Alternatiye

Cash GrainAlternativeCash Grain

With Fodder


experimental and on-farm trials have also beenseriously flawed by ignoring the value ofimpacts on natural resources. Both shortcom-ings should and can be remedied.

It would be reasonable to suppose that farm-ing systems that drastically reduce off-farm pol-lution and on-farm soil degradation, while gen-erating an economic return competitive with orsuperior to conventional methods, wouldreceive a great deal of research attention. Notfrom private agribusiness, necessarily, sincethere is little return for private companies inimproving technologies that reduce chemical useand production costs, but certainly from pub-licly funded research programs. However, thatsupposition would be erroneous, because only2 percent of government agricultural researchfunds have been spent on alternative, low-input or organic farming systems (O'Connell,

Not only has federally sponsoredresearch into alternative farmingmethods been badly shortchanged, thecriteria used to evaluate those methodsin experimental and on-farm trials havealso been seriously flawed by ignoringthe value of impacts on naturalresources.

1990). Government research funds have sup-ported and reinforced conventional farmingsystems, to the disadvantage of alternatives.This should change. A good start would be a

23

Figure 7. Net Farm Operating Income*, Pennsylvania Case Study, Transition Period UsingConventional Tillage

300

v -100.

-200.

-300.

H Multilateral DecouplingB Baseline PolicyD 25% Agrkhemical Input TaxD Sustainable Agricultural Adjustment ActI I Normal Crop Acreage Plan

-400 J_Continuous Corn Corn-Beans





With Fodder

large increase in research support for Low-Input Sustainable Agriculture (LISA) systems.

Only 2 percent of governmentagricultural research funds have beenspent on alternative, low-input ororganic farming systems.

Another valuable immediate change wouldbe for researchers throughout the government-funded agricultural research network to adoptcriteria such as those used in this study toevaluate conventional and alternative production

systems—criteria that account fully for on-farmand off-farm environmental costs, and that esti-mate the comparative returns to various sys-tems free of the distorting effects of baselineagricultural policies. This study has demon-strated that faulty criteria and incomplete costaccounting can lead to erroneous conclusionsabout the relative value of conventional andalternative systems.

Of course, if the acreage restrictions and sub-sidies tied to production levels that are imbed-ded in the commodity programs wereremoved, the relative scarcity of agriculturalproduction inputs would shift. Land would nolonger be artificially scarce nor the returns tointensive farming artificially high. The financialand economic returns of alternative productionsystems would conform more closely.

24

Figure 8. Net Economic Value, Nebraska Case Study

r9 Multilateral Decoupling

600.

Lj25% Agrichemical Input Tax

Lj Sustainable Agricultural Adjustment Act

LJ Normal Crop Acreage Plan

~sO 100.

ContinuousCorn

Corn-Beanswith

Herbicidesand Fertilizer

Corn-Beanswith Fertilizer

But NoHerbicides

OrganicCorn-Beans

Corn-Beans-Corn

-Oats/Cloverwith


Corn-Beans-Corn

-Oats/Cloverwith Fertilizer

But NoHerbicides

OrganicCorn-Beans

-Corn-Oats/Clover


Faulty criteria and incomplete costaccounting can lead to erroneousconclusions about the relative value ofconventional and alternative systems.

farmers would then demand, and researcherswould develop, production methods thatwould most likely be less chemical-intensive(Runge, 1986; Hay ami and Ruttan, 1985).Agriculture could come to rely more uponresource-conserving means of fertility and pestmanagement and to recognize the value of nat-ural assets. The catch in the "Catch-22" couldbe broken.

Additionally, agricultural production shouldnot be exempt from the "polluter pays" princi-ple. Incentives should be put in place thatforce producers to absorb the costs of thedamages they cause. Given the flexibility ofadjusted agricultural policy, and faced with thetrue costs of conventional farming practices,

Agricultural production should not beexempt from the "polluter pays"principle.

25

Figure 9. Net Farm Income, Nebraska Case Study

700_

600.

g 500_

I 400_;

300J

S Multil.iU-r.il Divouplini;

D Kisclinc I'nlia

LJ 25'; Alchemical Input IJX

: J Sustainable Agricultural Adjustment Act

J Normal ( nip AiTi\i|"o Plan

200_

100_

0

_•

• : . ' ;

•J:

r

ContinuousCorn

' • • •

^ :

si

i; ; • • ' 1

111

I

-

; •

Corn-Beanswith


Corn-Beanswith Fertilizer

But NoHerbicides

Corn-Beans-Corn


But NoHerbicides

OrganicCorn-Beans

-Corn-Oats/Clover


26

Figure 10. Net Farm Operating Income*, Nebraska Case Study

600 _

3 1 Multil.iU-r.il I )(.•<.(iupliii>j,

• llasoliiu-l'iilicvLJ2V, Agric.TKMiiic.il Input l.i\

LJ ^usl.iin.iWi' Ai;riailliir.il Adiuslmont V lI . . Norni.il C"rop Ain\i»i- 1'l.in

Corn-Be1.! n»with Fertiliici

But NoHerbicides

Corn-Beans-Corn

-Oats/Cloverwith


Corn-Beans-Corn


But NoHerbicides

OrganicCorn-Beans

-Corn-Oats/Clover



27

II. Technical Summary andSupporting Data

T he economic and resource accountingmodels used in this study integrateinformation from the field, farm,

regional and national levels. They represent ina consistent framework the farmer's financialperspective and wider environmental and eco-nomic perspectives. Net farm income is themeasure used to evaluate different productionsystems from the farmer's perspective. Netfarm income is defined to include the value ofchanges in soil productivity, the farmer's prin-cipal natural asset. This definition is consistentwith business and economic accounting prac-tices, which incorporate asset formation anddepreciation in their measures of income. Netfarm income differs from net economic value,however. The latter is defined to take intoaccount costs the farmers' activities impose onothers, such as the costs of water pollution,but excludes transfer payments to the farmersuch as subsidies and taxes.

This analysis uses models, or output frommodels, at four levels, corresponding to thefour-fold hierarchy of sustainability defined byLowrance (1986): field, farm, region, andnation.

A. Measuring Sustainability

At field level the USDA's Erosion-Productiv-ity Impact Calculator (EPIC) model (Williams,et al., 1982) was used to simulate the physicalchanges in the soil that would occur under

different agronomic practices and to generateestimates of soil erosion and productivity.EPIC, a comprehensive model developed toanalyze the erosion-productivity problem,simulates erosion, plant growth, nutrientcycling, and related processes by modelling theunderlying physical processes.

Net farm income differs from neteconomic value. The latter is defined totake into account costs the farmers'activities impose on others, such as thecosts of water pollution, but excludestransfer payments to the farmer such assubsidies and taxes.

A simple farm-level programming model wasdeveloped for each case study to assess theimpact of commodity programs—operatingthrough changes in input and output prices,acreage constraints, and deficiency payments—on net farm income and net economic value.The EPIC and programming models werelinked to calculate not only crop sales, produc-tion expenses, government deficiency pay-ments and net farm incomes for each croppingpattern, but also soil erosion, off-site damages,and a soil depreciation allowance.

29

At farm level, estimates from EPIC ofchanges in soil productivity were used to calcu-late the economic depreciation of the soilresource. These estimates were combined withagronomic production data to determine thefull on-farm production costs for each rotationand treatment. The farm level information onsoil erosion was coupled with regional esti-mates of off-site damage per ton of eroded soil(Ribaudo, 1989) to derive estimates of off-farmdamages resulting from each agronomicpractice.

At the national level, agricultural sectormodels developed by the Food and Agricul-tural Policy Research Institute generated esti-mates of changes in crop prices under the vari-ous policies. (FAPRI, 1988; 1990a) These priceswere then used in farm programming modelsto determine net farm income and net eco-nomic value. The farm-level models also gener-ated estimates of government payments for the

different crop production alternatives under thepolicy scenarios, which could then be general-ized to compare the relative federal budgetarycosts of different policy options. (See Figure 1.)

"The [FAPRI] commodity and policy analysissystem consists of an integrated set of modelsused to provide quantitative evaluations ofnational and international policies, as well asother exogenous factors that affect U.S. andworld agriculture. The objective of the systemis to determine the consequences of alternativefarm policy and program proposals for agricul-tural commodity markets and the U.S. agricul-tural sector." (Devadoss, et al., 1989)

The estimated market and target prices cor-responding to each policy alternative areshown in Tables 11 and 12. Since no projec-tions for the Sustainable Agricultural Adjust-ment Act of 1989 (SAAA) were available, pricescorresponding to the Normal Crop Acreage

Table 11. Crop Prices—1992-96 Averages',a,b

Baseline Sust. Ag. Normal Crop Multilateral 25% InputPolicy Adjustment Act Acreage Decoupling Tax

CornSoybeansWheatBarleyOatsAlfalfa0

CloverCorn Silage

($/bu)($/bu)($/bu)($/bu)($/bu)($/t)($/t)($/t)

2.055.803.342.061.66

85.0085.0021.33

1.975.243.221.851.45

85.0085.0021.33

1.975.243.221.851.45

85.0085.0021.33

2.535.263.662.381.81

85.0085.0021.33

2.055.803.342.061.66

85.0085.0021.33

a. Crop prices come from FAPRI 1988 p. 42, and 1990a p. 35.b. We have not included in this analysis a price differential between conventionally and organ-

ically grown products, even though a price differential does exist. Organically grownproducts can command a price up to 20 percent greater than that for conventionally grownproducts. (Ron Tammen, pers. comm., July 27, 1990).

c. Prices for alfalfa, clover and corn silage, are locally determined as these crops cannot betransported economically over long distances. As far as we could determine, there is nosource for prices of these crops under the alternative policy scenarios. Rather than speculateon the impact of the policies on the crops, we used the average state prices for the 81-89period.

30

Table 12. Target Prices3 ($/bu)

BaselinePolicy

Corn 2.75Wheat 4.00Barley 2.36Oats 1.45

a. Target prices fromb. For the alternative

Sust. Ag.Adjustment Act

2.75

o.oob

0.001.45

FAPRI 1990a, p. 27.

Normal CropAcreage

2.754.002.721.45

rotations we have assumed that the previouscorn. Under the Sustainable Agricultureacreage for wheatother small grains

MultilateralDecoupling

0.000.000.000.00

25% InputTax

2.754.002.361.45

land use was continuousAdjustment Act, if there is no established base

or barley, no payments will be made unless the crop is interplanted withfor non-human consumption. Therefore, the

barley under SAAA for these particularpresented here as such.

alternative rotations aretarget prices foreffectively zero

wheat andand are

(NCA) option, the most similar, were adopted.Currently formulated as the Integrated FarmManagement Program Option in the Food,Agriculture, Conservation, and Trade Act of1990 (U.S. House of Representatives, 1990),farmer enrollment in this program is limited to3 million to 5 million acres per year for a totalof 15 million to 25 million acres. If made avail-able to all farmers, different prices wouldemerge.

Under the NCA option, crop prices generallywould fall because the 0-92 program, wherebyfarmers can plant zero percent of their acreageyet still receive 92 percent of their previousprogram payments, would be eliminated. If the0-92 program were eliminated, some of theidled land would go back into corn, wheat, cot-ton, sorghum, and rice production, dominatingthe shift of acreage into soybeans, barley, andoats (FAPRI, 1990a).

The 25 percent input-tax scenario used thesame prices as baseline policy projections.Moreover, throughout the study, market pricesfor organically grown commodities and for con-ventionally produced equivalents wereassumed to be the same, although manyorganic farmers now get up to 20 percent

more. (Tammen, 1990) Ignoring this advantagebiases the comparisons against organic produc-tion systems, but reflects the probability that assuch systems were widely adopted and organi-cally grown produce became more readilyavailable, the price differential would narrowor disappear.

Prices estimated for the multilateral decou-pling option increase for corn, wheat, barley,and oats, but decline for soybeans. Pricesincrease for the multilateral decoupling scenariobecause "[e]xport volumes exceed currentlevels by nearly 15 percent... This increase indemand for U.S. exports also drives up com-modity prices, so that the value of exportsincreases by more than 15 percent. Thisincrease in export value would be even greaterwere it not for the decline in soybean and soy-meal prices that result from the reduceddemand for soymeal from the EC." (FAPRI,1988).

Analyses by other researchers also estimategeneral price increases under multilateral tradeliberalization. Table 13 shows a summary ofpredicted world prices compiled by Blandford(1990). These studies suggest a general con-sensus that prices for wheat and coarse grains

31

Table 13. Comparison of Predicted Effects of Multilateral

Base Year

1979-19811980-82

19841985198619952000

Wheat Coarse Grains

Percent Change

- 11072

302518

Source: Blandford, 1990.

- 33

111

233

11

Liberalization on World Prices

Study (source)

OECD (1987)Tyers and Anderson (1987)USDA (Roningen & Dixit, 1987)Tyers and Anderson (1986)USDA (Roningen & Dixit, 1989)Tyers and Anderson (1987)Parikh and coauthors (1988)

would increase under trade liberalization.These studies also uniformly predict priceincreases for rice, beef, dairy products andsugar (Blandford, 1990).

A natural resource accounting framework.Tables 14 and 15 compare net farm income andnet economic value per acre for Pennsylvania'sbest conventional corn-soybean rotation, withand without natural resource accounting. Table14, column 1, shows a conventional financialanalysis of net farm income. The gross operat-ing margin, crop sales less variable productioncosts, is shown in the first row ($45). Becauseconventional analyses make no allowance fornatural resource depletion, the gross marginand net farm operating income are the same.Government subsidies ($35) are added toobtain net income ($80).

When natural resource accounts are included,the gross operating margin is reduced by a soildepreciation allowance ($25) to obtain net farmincome ($20). (See Table 14, column 2.) Thedepreciation allowance is an estimate of thepresent value of future income losses due tothe impact of crop production on soil quality.The same government payment is added todetermine net farm income ($55).

Net economic value subtracts $47 as anadjustment for off-site environmental costs(such as sedimentation, impacts on recreationand fisheries, and impacts on downstreamwater users). Net economic value also includesthe on-site soil depreciation allowance, butexcludes income support payments. (See Table15 and Table 4.) Farmers do not bear the off-sitecosts directly, but they are nonetheless realeconomic costs attributable to agriculturalproduction and should be considered in cal-culating net economic value. Subsidy pay-ments, by contrast, are a transfer from tax-payers to farmers, not income generated byagricultural production, and are thereforeexcluded from net economic value calculations.In this example, when these adjustments aremade, an $80 profit under conventional finan-cial accounting becomes a $27 loss under morecomplete economic accounting.

B. On-Farm Costs of Soil Depletion

Assessments of the influence of soil erosionon productivity have consistently concludedthat erosion reduces soil productivity through-out the United States (Crosson, 1986; AmericanSociety of Agricultural Engineers, 1984; Pimentel,

32

Table 14. Conventional and NaturalResource Accounting EconomicFrameworks Compared

Net Farm Income($/acre/year)

w/o Natural w/NaturalResource Resource

Accounting Accounting

Gross OperatingMargin

45 45

-Soil Depreciation — 25

Net FarmOperatingIncome

45 20

+ GovernmentCommoditySubsidy

35 35

Net Farm Income 80 55

Table 15. Conventional and NaturalResource Accounting EconomicFrameworks Compared

Net Economic Value($/acre/year)

w/o Natural w/NaturalResource Resource

Accounting Accounting

Gross OperatingMargin

45 45

- Soil Depreciation — 25

Net FarmOperatingIncome

45 20

-Off-site Costs 47

Net EconomicValue (27)

1987; Schertz et al. 1989; Heimlich, 1989; Alt,Osborn and Colacicco, 1989). Assessments dif-fer, however, on the severity of these losses.

Many factors contribute to erosion's impacton soil productivity. The most serious loss is inthe soil's capacity to hold water in ways plantscan tap. In addition, crusting and other formsof degradation of the soil's surface structureinduced by erosion restrict seedling emergenceand root penetration. A third factor is the lossof such plant nutrients as nitrogen, phospho-rus, and potassium, which can be dissolved insurface runoff or attached to soil particles thatare moved during erosion (Frye, 1987; Larsonet al., 1985).

Estimating Long-term Productivity Changes

In the field, erosion-induced productivitychanges are almost impossible to isolate and

measure accurately. Many other factors alsoaffect crop yields, including weather, manage-ment, technology, and input use. Becausethere is no satisfactory methodology forseparating the interacting effects of many fac-tors on crop yields, soil productivity declinesdue to soil erosion can be easily masked.

For such reasons, in 1981 the USDA's Agri-cultural Research Service (ARS) organized anational erosion productivity modeling team,which developed a comprehensive tool, theEPIC model, to analyze erosion's effect onproductivity. Based on representations of thephysical processes of erosion, plant growth,nutrient cycling, and water movements in thesoil, the model requires detailed soil andweather information as inputs. A comprehen-sive data base developed specifically for usewith EPIC includes detailed soil data for 700different soil series, and the average monthly

33

weather data for 300 different locations in theUnited States. (Williams et al., 1989). EPIC cansimulate the effects of crop rotations, tillagemethods, soil conservation practices, and fer-tilizer use on crop yields, soil erosion rates,loss of soil nutrients, and many other soil fac-tors. Output from the EPIC model includescrop yields, soil erosion rates, loss of soilnutrients in runoff and percolation, andchanges in more than 30 variables that describesoil structure and properties.

Simulations of EPIC have been performed on150 test sites in the continental United Statesand 13 sites in Hawaii. Simulated runoff andsediment were compared with actual measure-ments and the results were reported to bereasonably close (Williams and Renard, 1985).Crop yields obtained from the EPIC modelwere also compared with actual measurementsfor 12 research plots in 8 states. This modelhas produced reasonable estimates of cropyields under a variety of climatic conditions,soil characteristics, and management practices(Williams and Renard, 1985). However, beforethis study EPIC had not been tested with low-input rotations.

In this study, the EPIC model was used toestimate soil erosion and its impact on soilproductivity for the conventional and alterna-tive rotations in Nebraska and Pennsylvania.Estimated soil erosion rates for the differentfarming practices seemed reasonable, but simu-lated long-term soil productivity changes werenot consistent with information from the fieldtrials at the Pennsylvania site, for which cali-bration was first attempted.

Initial runs of the model overestimatedobserved yields for the conventional rotationsby 10 percent or more, and underestimatedyields of the alternative rotations by 8 percentor more. Initial runs predicted almost nodecrease in productivity for conventional rota-tions, even after severe erosion and dramaticchanges in soil structure and hydrology. Con-versely, the model initially predicted noimprovement in productivity for the alternative

rotations, although in the field trials yieldsimproved considerably within a few years oftransition away from agrichemical inputs.

In most runs of the EPIC model for thePennsylvania site, estimates of soil bulk densityincreased over time. These estimates were notconsistent with experimental results. In thelow-input farming system trial at the RodaleResearch Center, soil bulk density decreasednearly 20 percent from 1982 to 1986. At certaintimes of the year, the rate at which waterinfiltrated into the soil on the alternative plotswas four times greater than on conventionalplots. The soil-saturated conductivity, calcu-lated from these bulk density estimates, alsoincreased over time.

Erosion reduces productivity primarilythrough loss of the soil's capacity to makewater available to plants (National Erosion-SoilProductivity Research Committee, 1981). Thesoil's water content is affected by many factorssuch as the maximum amount of water that thesoil can hold, the density of the soil, and theease with which water moves through the soil.In the EPIC model however, "soil saturatedconductivity," a variable to which yield esti-mates are quite sensitive, is treated as a con-stant once calculated at the beginning of thesimulation; changes in soil structure do notalter estimated saturated conductivity even asthe soil erodes. Thus, the model omitted a keyfeedback from soil structure and organic con-tent to soil productivity.

To overcome this difficulty, the simulation ofthe long-term soil productivity changes fordifferent farming practices was accomplished inthe following steps:

1. Parameters were set for the EPIC modelusing the appropriate soil series data fromthe EPIC database and measured fielddata;

2. The EPIC model was calibrated to bringthe simulated crop yields in line with themeasured crop yields;

34

3. The various crop rotations were simulatedfor the length of the crop rotation (fiveyears for Pennsylvania, four years forNebraska) without soil erosion. These esti-mates were taken to be the initial cropyields. Weather data for a normal year,that is without drought or excessive rain-fall, was repeated for each year of thesimulation.

4. The various crop rotations were simulatedfor 30 years with soil erosion and with anormal weather year repeated.

5. The value of some soil variables in theEPIC model (for example, the soil bulkdensity and the soil saturated conductivity)were replaced with values from the lastyear of the 30 year simulation, or withvalues based on data from the last year ofthe field trials where available.

6. The various crop rotations were againsimulated for the length of the crop rota-tion without soil erosion, but with therecomputed values for several soil para-meters. These estimates were taken to bethe final crop yields.

As long-term soil productivity changes weresimulated under unchanging weather andmanagement conditions, the differencesbetween the initial crop yields and the finalcrop yields were taken to be the result of long-term soil productivity changes.

Estimating a Soil Depreciation Allowance

Estimates of the long-term soil productivitychanges taken from the EPIC model for differ-ent farming practices were then incorporatedinto present-value calculations to compute theeconomic impacts of soil productivity changesdue to soil erosion.

The prices used to calculate the value of theproductivity changes were those projected bythe Food and Agricultural Policy ResearchInstitute for each policy scenario tested. The

yield change for each rotation period was takento be the total yield change for the 30-year sim-ulation divided by the number of rotations in30 years, thereby assuming a linear change inyields. In this way the productivity change foreach rotation included only the change attribu-table to that period. Since input costs wereinvariant to yields, this change in yields wasthen multiplied by the crop price to determinethe loss in net farm income for the period. Thepresent value of all income losses over 30 yearsinto the future, using a 5-percent real (exclud-ing inflation) discount rate, represents the lossin soil productivity. (See Figure 11).

The formula for determining the depreciationallowance is as follows:

Soil Depreciation Allowance =[(Yo-Yn)/(n/RL)] * Pc * {[ l - l / ( l + i)n]/i},

where Yo is initial yield,Yn is final yield,RL is rotation length,n is period under consideration,Pc is crop price, andi is real interest rate.

For rotations that include more than one crop,each crop was weighted according to its acre-age in the rotation, and these weighted cropdepreciation allowances were added to deter-mine the allowance for the rotation as a whole.When comparing rotations of different length,the rotation with the longest period was usedto calculate the depreciation allowance for allrotations. (See Appendix B for an example ofthese calculations.)

The declining yields described by Figure 11are not characteristic of U.S. agriculture ingeneral.4 In fact, the average yields for mostcrops in the United States have been rising, asnew technologies have been adopted. Yet thisdoes not mean that real economic losses havenot occurred. Because the soil depreciationallowance measures soil productivity, not theproductivity of the technology, the relevantissue is whether the technology is more pro-ductive on a better soil than on a degraded

35

Figure 11. Calculation of Soil Depreciation

"RU

RLTime RL + n

Soil Depreciation Allowance for the rotation length (RL) is equal to the net present value of the productivity lossrepresented by the shaded area. (See Appendix B)

soil. When technologies allow higher yields,some or all of the effect of soil degradation onyields may be masked by technologicalchanges, even though the yield increases mighthave been greater had the soils not beendegraded. This difference between actual andpotential yield represents a real loss of income.A lower yielding technology or practice thatdoes not damage the soil would have no con-comitant soil depreciation. The yield trend initself is thus irrelevant in calculating soildepreciation allowances; what matters is thedifference between actual and potential yield.(See Walker and Young, 1986; Larson, Pierce,and Dowdy, 1983)

C. Off-Farm Costs of Soil Erosion

The off-farm costs of agricultural productiondue to erosion are also complex. Clark et al.(1985) estimated that annual off-farm damagefrom all sources of soil erosion was $8.1 billion,about $3.5 billion of it from eroding cropland.5

Sediment washing off cropland and into water-ways can fill reservoirs, block navigation chan-nels, interfere with water conveyance systems,harm aquatic plant life, and degrade recrea-tional resources. Agricultural pollutants include

fertilizers, pesticides, and salts. If pesticidesand nitrates in surface- and groundwater sup-ply reach high enough concentrations, they canharm plant and animal life and endangerhuman health. Water quality degradation alsodamages recreational and commercial fishing,and water supplies for municipal and industrialuse. (National Research Council, 1989)

Ribaudo (1989) of the Economic Research Ser-vice, USDA, has presented a comprehensiveestimate of the off-site cost of soil erosion fordifferent areas in the United States. (See Tables1 and 2). Off-site damages from soil erosionvary widely for different regions. In the North-east, where many rivers drain into the denselypopulated seaboard and the economic value ofwater is high, damage per ton of erosion is$8.16 (1990 dollars). At the other extreme, inthe sparsely populated, dry Northern Plainswhere the economic value of water is low,damage per ton of erosion is $0.66. These esti-mates were combined in this study with ero-sion estimates from EPIC to calculate off-farmresource costs for the various rotations. Theerosion rates were weighted by the crop set-aside requirements, where applicable, andmultiplied by the regional per ton damage esti-mates. These values are shown as the off-farm

36

costs in Tables 4 and 5 and in Tables 26through 28. (See Appendix A.)

D. Pennsylvania Case Study

The Pennsylvania case study6 was basedupon research conducted at the RodaleResearch Center, which has accumulated aninformation base on the changes in plantdynamics, and on the physical and biologicalproperties of soil during and after the changeto alternative cropping systems. Beginning in1981, the Farming System Experiment wasestablished on a six-hectare tract of land insoutheastern Pennsylvania on which corn hadpreviously been grown using fertilizers, pesti-cides, and standard tillage practices.

The Rodale Research Center (RRC) is locatedin Berks County in southeastern Pennsylvania.Most of the county is characterized by rollinghills and a fairly uniform climate with an aver-age annual precipitation of 42 inches. Thesoils—of shale, limestone, and gneiss origin-have been planted with a number of differentfield crops. The well-drained soils at theresearch site are formed from weathered shaleand limestone, and range from shallow to deepin profile. The soils, formed from colluviumthat have moved from the sides of the hillsand have been deposited in the valleys, makeup some of the most productive land.

Topography and soil types in southeasternPennsylvania make the hill slopes highly sus-ceptible to surface runoff, while the valleys aresusceptible to leaching. This is Pennsylvania'smost productive agricultural region, and hasthe largest number of farms. Hay, corn forgrain and silage, and soybeans are normallythe crops commanding the most acreage, inthat order.

The RRC Farming System Experiment com-pares three representative farming systems:

1. A low-input animal system that representsa crop and livestock farm using manure

prior to each corn crop and legume hay asnitrogen sources. This system uses a five-year crop rotation and produces corn, soy-beans, small grains, and hay.

2. A low-input cash grain system that repre-sents a farm with no animals needing acash crop each year. The cropping systemrelies on diverse rotations and legumes forsoil fertility and to produce cash graincrops.

3. A conventional corn and soybean systemwith purchased fertilizers and pesticidesapplied as recommended by PennsylvaniaState University guidelines.

The research at the Rodale Research Centeris one of few long-term experiments in theUnited States that compares soil biochemicalchanges and crop physiological changes underconventional and low-input farming systems.The experiments were designed so that statisti-cal analysis could detect the results of differenttreatments. Information has been recorded forlevels of macro- and micronutrients, acidity,cation-exchange capacity, and organic mattercontent, crop growth rates, crop yields,weather conditions, operation costs, materialcosts, and length of time for field operations.Although the soil is heterogeneous at the site,the field trials were designed to allow compari-sons between systems. Weather conditionswere identical for every farming system in theexperiment, so the observed differences shouldbe the result of different farming practices.

Alternative Practices and Yields

Five cropping systems based on the RodaleFarming Systems Experiment are included inthis case study: 1. conventional corn-soybean(CCBCB); 2. alternative cash grain (ACG); and3. alternative cash grain with fodder production(ACGF). Continuous corn and continuousalfalfa production systems have been includedfor comparative analysis. The data for 4. thecontinuous corn production (CC) are based onthe two consecutive years of corn in CCBCB,

37

and on previous similar studies by Penn Statescientists (Crowder et al., 1984). The data for5. continuous alfalfa production (ALLHAY) areobtained from the two consecutive years of hayin ACGF and the Kutztown Farm adjacent tothe Rodale Research Center.

The rotations included here are summarizedin the box.

improves crop yields is debated. Lower short-term, but greater long-term yields have beenreported (Crosson, 1981).

Two different tillage methods are consideredin this study: conventional tillage with mold-board plow; and reduced tillage with chiselplow. The conventional tillage method is usedin the RRC Farming Systems Experiment. Data

Farming Systems Experiment

1. Conventional Continuous Corn Rotation(CC)• Rotation: Five-year continuous corn

production• Weed control: Penn State University

(1987) herbicide recommendations• Nitrogen fertility: ammonium nitrate or

urea based on Penn State Universityrecommendations of 150 pounds peracre

2. Conventional Corn-Bean Rotation(CCBCB)• Rotation: five-year corn-soybean• Weed control: Penn State University

herbicides recommendations• Nitrogen fertility: ammonium nitrate or

urea based on Penn State Universityrecommendations of 150 pounds peracre for corn

, Rodale Research Center

3. Alternative Cash Grain Rotation (ACG)• Rotation: corn-barley/soybean-wheat/

clover-corn-soybean• Weed control: rotary hoe and cultivation

for corn and soybean• Nitrogen fertility: legume green manure

crops plowed down before corn

4. Alternative Cash Grain with FodderProduction Rotation (ACGF)• Rotation: corn-soybean-corn silage-

wheat/clover-clover• Weed control: rotary hoe and cultivation

for corn and soybean• Nitrogen fertility: animal manure applied

before each corn and plowdown of hay

5. Continuous Alfalfa Production (ALLHAY)• No fertilizer or pesticides• Alfalfa hay cut three times per year

Tillage methods affect soil and chemical con-servation very differently. Reduced tillage andno-till are usually described as "conservationtillage." Conservation tillage saves topsoil andmoisture and may also reduce water runoffbecause much of the residue from the previouscrop stays on top of the soil. Conservation till-age, particularly no-till, also has some disad-vantages. The protective layer of vegetation canharbor insect pests, plant diseases, and weedsand requires more pesticide use than other till-age systems. Crop yield responses to differenttillage methods depend on soil, weather, andmany other factors. Whether conservation tillage

for the reduced tillage are based on Penn StateAgronomy Guide (1987) and on two previousstudies in Pennsylvania (Crowder et al., 1984;Reid, 1985), which found no short-term interac-tion between crop yields and reduced tillage.Experiments at Penn State University by Bep-pler et al. (1981) achieved equal yields for allconventional, reduced-, and no-till methods.Yields for the reduced-till systems were there-fore assumed to be the same as for conven-tional tillage. The long-term difference inresource costs associated with the reduced-tillage methods is, however, significant. (SeeTable 4.)

38

Table 16 presents actual crop yield averagesfor each type of crop rotation and tillagemethod in the transition and normal periods.(See also Figures 12 and 13.) Crop yields for theconventional corn-soybean rotation (CCBCB),alternative cash grain (ACG), alternative withfodder (ACGF), and continuous alfalfa (ALLHAY)were obtained from the Farming Systems Expe-riment. The continuous corn yield is assumedto be 10 percent less than that of the corn-soybean rotation. This assumption is based ona comparison of corn-after-corn and corn-after-soybean yields in the corn-bean rotation andprevious empirical studies (Crowder et al.,1984).

Alternative farming systems often require atransition period to become fully establishedafter a changeover from conventional farming(USDA, 1980). Crop yields often fall markedly

during this transition and severe weed infesta-tions may occur. Dabbert and Madden (1986)discussed three major reasons for this transi-tory effect: rotation adjustment, biological tran-sition, and lack of experience with a differentfarming practice.

Before the Rodale Farming Systems Experi-ment began in 1981, this experimental plotgrew corn with conventional farming practicesand both fertilizer and pesticides. In the firstfive years of the Farming Systems Experiment,crop yields for corn in the alternative plotswere lower than those in the conventionalplots. In the second five years, however, cornyields in the alternative farming plot surpassedyields in the conventional farming plot. (SeeFigure 12.) Yields for wheat and barley, forwhich there are no conventional comparisons,also improved over the period. Results for

Table 16. Average Crop

Rotation

Continuous CornCorn-BeansAlternative Cash GrainACG w/FodderContinuous Alfalfa

Rotation

Continuous CornCorn-BeansAlternative1 Cash GrainACG w/FodderContinuous Alfalfa

Yields from Rodale Experimental Trials

Corn(bu/ac)

97.10106.8077.6187.93

Corn(bu/ac)

116.67128.34130.31129.53

a. One half of clover harvested isClover yield reported here only

Transition Period

Soybeans(bu/ac)

42.7628.1643.19

Wheat(bu/ac)

32.0438.78

Normal Period

Soybeans(bu/ac)

51.0445.1343.36

Wheat(bu/ac)

34.4045.15

for sale and another '.includes the half for

Barley(bu/ac)

31.00

Barley(bu/ac)

31.00

Alfalfa(t/ac)

1.25

Alfalfa(t/ac)

1.75

Clovera

(t/ac)

0.510.75

Clover3

(t/ac)

0.901.75

Silage(t/ac)

10.50

Silage(t/ac)

16.19

ialf is plowed down as green manure,sale and not the half for green manure.

39

Figure 12. Average Annual Corn Yields

1?

SiI 10X

se- 8

2 6j

e8 4

-a ^43

-

/

/

/ r

><-

ConventionalAlternative

X

80 81 82 83 84 85 86

Year

88 89 90 91

.': RRC Farming System Trials, Rodale Research Center, (Kutztown, Pa)

soybean yields are more mixed. (See Figure 13.)During the 10 years of the field trials, droughtoccurred in 1981, 1983, and 1988.

In the economic analysis, two periods, atransition and a normal period, are repre-sented, each one encompassing a completefive-year rotation period. The first five yearsare considered the transitional period, the sec-ond five years the normal years. Since onlynine years of data were available for a ten-yearanalysis, the fifth year of the experimental datawas repeated at the end of the transitionperiod and the beginning of the normal period.

The changes in soil properties over the firstfive years of the Farming Systems Experimentsare shown in Table 17. Several notable changescan be seen, particularly in soil organic matter,soil acidity, cation-exchange capacity, andphosphorous content.

Table 18 shows the long-term yield estimatesgenerated by the EPIC model for this case

study. EPIC estimated significant yield reduc-tions for the conventional rotations, and smallyield increases for the alternative rotations andfor continuous alfalfa production.

Production Costs

Crop production costs in this study includeoperating costs, including those for machineryand material; labor; fertilizer and pesticides. AHof these costs were normalized for the refer-ence year 1990. Labor costs for field operationswere included in the analysis but costs asso-ciated with management time were not. In theFarming Systems Experiment, fairly completeproduction cost data were recorded for eachrotation.

Table 19 reports crop production cost data foreach of nine production activities. Cost data forthose activities with conventional tillage wereobtained from experiment records. Cost datafor reduced tillage were based on similarstudies in Pennsylvania (Crowder et al., 1984;

40

Figure 13. Average Annual Soybean Yields

X

1 3

2 -

IM • — Com entiun.il

' Altornativi1'

80 81 82 83

Yeai

•Alternative Yields Unavailable for 1983 and 1988

Source: RRC Farming System Trials, Rodale Research Center, (Kutztown, Pa)

88 89 90 91

Table 17. Soil Data from Rodale

Year/rotationpH

1981

All systems bulked

1986

Corn-BeansAlternative Cash GrainA C G w/Fodder

a. Phosphorousb. Organic Matterc. Cation-Exchange Capacity

6.7

7.06.56.5

Research Center

K

0.56

0.210.240.26

Field Trials

CationsMg

1.4

2.11.31.2

Ca

7.6

7.26.46.3

CECC

11.8

10.410.69.6

pa

(lb/ac)

323

317339329

OM b

(%)

2.4

2.42.72.6

41

Table 18. Yield Estimates for PennsylvaniaCase Study Using the EPIC Model

Rotation

Continuous Corn

Corn-Beanscornsoybeans

Alternative Cash Graincornsoybeanswheatbarleyclover (ton)

ACG w/Foddercornsoybeanswheatclover (ton)silage (ton)

Continuous Alfalfa(ton)

Yield(bushels/acre)

initial

136

14155.6

13538.242.638.11.45

13440.948.3

1.5518.5

1.34

yr 30

113

12145.6

13739.343.539.31.54

13942.249.2

1.6419.5

1.45

Dum et al., 1981). Fertilizer costs include bothmanufactured fertilizer and animal manure.The animal manure price used in the alterna-tive cash grain with fodder system was basedon the Kutztown Farm Report (Culik et al.,1983). The prices for production inputs wereassumed to be the same for the different policyscenarios.8

Results of Policy Analysis for Pennsylvania

Within the accounting framework explainedearlier, net economic values and net farmincome are presented for a full ten-year period(two rotations) including a five-year transitionperiod and a five-year normal period (Figures 2,

3 and 4; Tables 26A and 26B), and for the transi-tion period alone (Figures 5, 6 and 7; Tables 27Aand 27B). Because the normal period for thealternative rotations cannot be attained withoutgoing through the transition, it is irrelevant toshow the normal period analysis by itself. Inthe ten-year analysis the returns for the normalperiod were discounted to the initial year.

The economic and financial results show acritical divergence, and both differ from incom-plete, conventional accounting results:

• The net economic value generated by thebest alternative rotation is higher than thatof the best conventional rotation, not onlyunder the decoupling policy option butunder all policy options. This is true evenin the transitional period when yields aredepressed. During a ten-year period span-ning both transitional and normal yields,alternative rotations produce almost twicethe economic returns per acre. The largedifference in on-farm and off-farm resourcecosts between conventional and alternativesystems leads to this result.

• Nonetheless, under baseline policies andcommodity support payments, farmers whocould not or would not look beyond thefive-year transitional period to the prospectof more normal yields thereafter would findconventional practices most profitable.

• Similarly, farmers who failed to factor long-term losses in soil productivity into theirfinancial estimates would find conventionalpractices more profitable under all policyoptions except the Sustainable AgricultureAdjustment Act.

Policy options can be compared along withalternative farming systems. A policy scenarioof multilateral decoupling of income supportfrom agricultural production provides a usefulbenchmark for judging results under differentpolicy scenarios because it minimizes the dis-tortion of agricultural market incentives. Nolinks are assumed between production and

42

Table 19. Production Costs and Crop

Tillage/Rotation

Conventional Tillage

Continuous CornCorn-SoybeanAlternative Cash GrainACG w/FodderContinuous Alfalfa

Reduced Tillage

Continuous CornCorn-SoybeanAlternative Cash GrainACG w/Fodder

TotalProduction

Costs

1004861760796477

1019875758799

Sales, Pennsylvania, under Baseline Policy($/acre/10 years)

FertilizerOperating &

Costs

590534529561271

622563550587

PesticideCosts

260179000

26017900

LaborCosts

154148231235206

137133208212

CropSales

(Transition)

8961087816887531

8961087816887

CropSales

(Normal)

1076130212481277

701

1076130212481277

income support—no supply control measuressuch as set-asides or base acreages, no importtariffs, no export enhancement, and no importquotas. Farmers would respond directly to mar-ket signals that were undistorted by agriculturalpolicies. If these policies were adopted multilat-erally, crop prices in the U.S. could be expectedto increase as supplies from generally less effi-cient European and Japanese producers fell.

A policy of multilateral decoupling producesthe greatest net economic value of all the poli-cies tested. For the full ten-year period, the neteconomic value of the best alternative rotationis more than $466 an acre, the conventionalcorn-bean rotation is $251 an acre, and the con-tinuous corn rotation is negative. If farmersshifted to alternative rotations, the gain in neteconomic value would be best measured as thedifference between net economic value of con-ventional rotations under baseline policy andnet economic value of the alternative rotationsunder multilateral decoupling—a difference aslarge as $1,385 per acre over ten years. Thoughfinancially profitable, conventional rotations leadto substantial economic losses under baseline

policies and modifications thereof, both in thetransitional period and in the longer term.

Undistorted policies would simultaneouslyincrease economic value and substantiallyreduce the costs of supporting farm income.Because crop prices would be higher undermultilateral decoupling and because alternativerotations are intrinsically more profitable (seeFigures 4 and 7), lower support paymentswould be needed to maintain farm income.Over ten years, for example, support paymentsfor alternative rotations would average $23 peracre per year. By contrast, baseline supportpayments for the continuous corn rotationexceed $54 per acre per year. During the transi-tion period, the best alternative rotationrequires a payment greater than the best con-ventional rotation to achieve parity. Once thetransition period ends and yields improve, noincome support whatever is needed. Thisimplies that the budgetary cost of support pay-ments to maintain farm income in this regioncould be reduced by more than 50 percent,with much less environmental damage, underless distorted agricultural policies.

43

Baseline agricultural policy, by contrast,obscures the true economics of agriculturalproduction systems. Policies intended to con-trol supply and support income actually lowernet economic value and net farm income in thelong run, by favoring production systems withhigher resource costs, discouraging adoption ofresource-conserving methods, and raising on-and off-farm resource costs. The highest gov-ernment support under baseline policy goesnot to the rotations that produce the greatestnet economic value but instead to the rotationswith the lowest net economic value and thehighest on-and off-farm resource costs. (SeeTable 10.) Baseline agricultural policy in thiscase is completely inconsistent with the under-lying resource economics.

The distorting effect of the baseline policy isparticularly evident during the transitionperiod. Under baseline policy the conventionalcorn-bean rotation yields the highest net farmincome, despite its much higher soil deprecia-tion costs. (See Figure 6 and Table 27B.) Underbaseline policy during the transition period, netfarm income for the conventional corn-beansrotation is superior to both alternative rota-tions. Not surprisingly then, rotations thathave high resource costs have become conven-tional. Under less distorted policies, withincentives provided that are in line with theunderlying resource economics, resource-conserving rotations would become "conven-tional," not "alternative."

In order to sensitize farmers to the off-siteresource costs of conventional practices, a taxon chemical inputs can be adopted as a modifi-cation of existing policies or other options. The25 percent input tax, a transfer payment, doesnot change the relative net economic values ofthe rotations, (see Figures 2 and 8) but it doeschange net farm incomes. The net farm incomeof the alternative rotations, which are chemical-free, are improved relative to the net farmincome of the conventional rotations. (SeeFigures 3 and 6.) During the transition periodthe 25 percent input tax is high enough tomake both alternative rotations marginally

superior to the conventional corn-beans rota-tion; a 16 percent tax is enough to equalize netfarm income for the conventional corn-beansand alternative cash grain rotation. In this casestudy, therefore, even grafted onto baselinepolicies, a 25 percent tax on chemical inputswould make farmers' financial incentives cor-respond to the basic economic ranking ofproduction choices.

The shift in net farm income from conven-tional to alternative practices suggested by thelevels of tax applied in these policy scenariosimplies a much higher elasticity of demand (thatis, a higher degree of substitution), for agri-chemicals than has previously been reported(Council for Agricultural Science and Technol-ogy, 1980a; Daberkow and Reichelderfer, 1988;Hrubovcak, LeBlanc and Miranowski, 1990).

There are two possible reasons for this diver-gence. First, most elasticities of demand foragrichemicals are reported as short-term elastic-ities; the long-term price elasticities are uncer-tain. If agrichemical prices were increased andkept higher, farmers would search for, andresearchers would develop, cheaper alterna-tives for pest and nutrient management, suchas those detailed in this report. Over time, assubstitutes were developed and proven, feweragrichemicals might be used.

Secondly, price elasticities are developedusing agricultural production functions. If theseproduction functions do not include alternativetreatments or management technologies, theelasticity of substitution will be underesti-mated. As alternative technologies have notbeen widely adopted yet, data used to estimateproduction functions will not have taken thepotential substitutability of alternative practicesfully into account. Different production func-tion assumptions will result in different conclu-sions regarding the ultimate effect of an agri-chemical tax (Hrubovcak, LeBlanc andMiranowski, 1990). The results presented herestrongly suggest that the substitution possibili-ties for agrichemicals are greater than beenpreviously considered.

44

Other modifications of baseline policieswould have more far-reaching effects. Provi-sions of the Sustainable Agriculture Adjust-ment Act would affect net economic value andnet farm income of various rotations throughcrop price adjustments (assumed similar tothose under the Normal Crop Acreage pro-gram), as well as through transfer payments.The SAAA option would make net farmincome under the alternative rotations moreprofitable than conventional rotations. Thealternative cash grain system with fodderproduction has its highest net farm income forthe ten-year period under SAAA. The impactof the SAAA policy alternative is most notableduring the transition period, significantlyimproving the financial position of the alterna-tive rotations during this critical time.

In terms of improving the profitability ofalternative production systems, this legislativeprovision appears to work, but at a sacrifice ofeconomic productivity compared to multilateraldecoupling. Net economic value per acre islower for each rotation under SAAA than formultilateral decoupling (or baseline policy)because of lower projected prices (recall that inthe FAPRI projections the 0-92 program isassumed to be eliminated without the imple-mentation of any compensating supply con-trol). Compared to baseline policy, however,this option would induce farmers to switchaway from rotations with high resource coststoward the more sustainable resource-conserving rotations, raising net economicvalue. If farmers switched from continuouscorn production to alternative cash grainproduction with fodder, the gain in net eco-nomic value would be $1,234 per acre over tenyears.

The normal crop acreage program has mixedimpacts on net economic values and net farmincomes. Lower crop prices reduce net eco-nomic values of each rotation. The price of soy-bean, a crop not supported by target prices,drops, which also reduces the net farm incomeof the corn-beans rotation. Deficiency paymentsfor program crops (mainly corn) expand to

cushion farm income. Compared to otherpolicy options, this proposal is therefore eco-nomically and fiscally inefficient. Nonetheless,under this policy, alternative practices stillappear clearly superior relative to conventionalpractices over the ten-year horizon.

Financially, the NCA program ban on theharvest of nonprogram crops if deficiency pay-ments are received, hurts the alternative cashgrain with fodder system, because the salevalue of the fodder is too great to forego, evenconsidering the loss of deficiency payments onthose acres. Government payments for thealternative cash grain system without fodderare as high as those under continuous cornbecause a previous history of continuous cornproduction was assumed. Overall, this optionis a costly and relatively ineffectual way of cor-recting farmers' incentives. This policy woulddo more to encourage agricultural sustainabilityif it were changed to accommodate both pay-ments and sale of leguminous nonprogramcrops such as clover and alfalfa, which arecommonly used in low-input rotations.

In summary, the Pennsylvania case studyshows that resource costs must be included ineconomic comparisons of alternative farmingsystems if valid conclusions are to be reached.It also shows the harmful economic, environ-mental, and fiscal effects of commodity supportprograms that distort farmers' incentives.Where on-site and off-site resource costs arehigh, resource-conserving production methodsare not just feasible but more economical; toencourage widespread adoption of thesemethods, policy changes are essential.

E. Nebraska Case Study

The Nebraska case study is set in the dryeast-central part of the State, where farmsdepend heavily on two crops, corn andsoybeans.

East-central Nebraska lies at the westernedge of the unirrigated corn belt, and on the

45

eastern fringe of Great Plains agriculture to thewest, where farms depend more than in theCorn Belt on winter wheat and cattle ranching.Nebraska has many irrigated farms in its cen-tral, northern, and western regions. Aboutthree-quarters of continuous corn production inthe state is irrigated (Daberkow and Gill, 1989).Both gravity and center pivot irrigation systemsare used to tap large groundwater reserves.Besides corn, farmers plant soybeans, winterwheat, grain sorghum, oats, and other crops.

Eastern Nebraska is a major cattle-feedingand hog-production area. In north centralNebraska, the Sandhills, a large grasslandregion, is well suited to cattle ranging. Perma-nent pastures are more common in the west ofthe state than in the east.

Trends in land use over the past thirty yearsin eastern Nebraska have paralleled develop-ments elsewhere in the Corn Belt. Rotationsinvolving oats and alfalfa have greatlydiminished as fertilizer costs have declined,and the area of permanent pastures has shrunk(US GAO, 1990).

Continuous corn and corn-beans are the mostcommon rotations used on land producing cornin Nebraska. On average across the state, 62percent of the land planted to corn in 1988 wasalso planted to corn in the two precedingyears; 22 percent was planted to corn followedby soybeans followed by corn. The continuouscorn rotation is much more common inNebraska than in other states of the Corn Belt.For the 10 major corn-producing states, 26 per-cent of land was in corn the previous twoyears, and 38 percent was in soybeanspreceded by corn (Daberkow and Gill, 1989).Table 20 summarizes this data.

Environmental issues in agriculture havebecome important to most Nebraskans, non-farmers as well as farmers. Nitrate levels nearor above the Environmental Protection Agencylimit for drinking water (10 parts per million)have been documented in the water supplies ofnearly one out of five rural communities, and a

number of them have had to modify theirwater systems as a result. Small amounts ofthe pesticide atrazine have also been found inwater supplies in the intensively irrigated cen-tral Platte River Valley (Aiken, 1990).

Soil erosion is another concern, particularlyin eastern Nebraska, where conservation com-pliance requirements have had to be enforcedto protect the land. The shallow-rooted soy-bean crops are especially vulnerable to erosion.Minimum and no-tillage systems have beensuccessful in Nebraska because they reducewater runoff, although they often requireincreased use of herbicides or a change in croprotations.

Cropping Systems and Yields

Three basic cropping rotations were includedin this analysis. These include corn-soybean(CB), continuous corn (CC), and a four yearrotation of corn, soybeans, corn, and oats withsweetclover (ROT). The corn-beans and four-year rotations have three treatments: conven-tional use of commercial herbicides and fer-tilizer (HFCB and HFROT); fertilizer but noherbicides (FOCB and FOROT); and an organictreatment with no commercial herbicides or fer-tilizer (ORGCB and ORGROT). This last alter-native employs manure as a fertility supple-ment to the soybean rotation.

The crop yields for each of the seven crop-ping systems were taken from experimentaltrials done by Sahs and Lesoing (1985; 1990) atthe University of Nebraska for the years1980-89.

The experimental results for each of theseven cropping systems are presented in Table21. For the four-year rotation, yields wereabout the same for all systems. Corn and soy-bean yields are lower under the nonpurchasedchemical alternative (ORGROT) than under theother two alternatives. For corn, four-year rota-tion systems generally give lower yields thando the other systems (both the two-year rota-tion and the continuous corn). For soybeans,

46

Table 20. Common Crop

Previous Crop

1986 1987

Corn CornCorn SoybeanCorn AlfalfaCorn Other

Soybean CornSoybean SoybeanSoybean Other

Wheat CornWheat Other

Alfalfa AlfalfaAlfalfa Other

Oats CornOats Other

Total

Rotations

State

6.9

62413

222

nr

nr3

nrnr

11

99

Source: Daberkow and Gill, 1989, p

nr—none reported

a. The ten states includedNebraska, Ohio, South

Used on Land Producing Corn, 1988

Nebraska

Dry

10

Irrigated

Million Acres Planted

2.3

Percent

24641

4441

16

nrnr

31

95

35

4.6

793

nr4

81

nr

nr1

1nr

nr1

98

here are: Illinois, Indiana, Iowa, Michigan, Minnesota,Dakota and Wisconsin.

State Averagea

53.2

26533

3843

13

41

11

94

Missouri,

the four-year rotation yields are more compara-ble to the other alternatives.

Table 22 presents the long-term yield changesfor each cropping system. The four-year rota-tion system with purchased herbicides and fer-tilizer has erosion rates 16 percent lower thanthe HF corn-bean treatment. Moreover, the useof manure (ORGCB and ORGROT) rather thanpurchased fertilizer reduces erosion rates by 16percent and 41 percent, respectively.

The estimated changes in yields due to ero-sion amounted to a 7 percent decline over a30-year period for continuous corn, and a 1percent decline for the corn-beans treatmentusing inorganic inputs. For the 4-year organiccropping system, yields increase on averagemore than 3 percent over the 30-year period.

Physical changes in the soil under differentcropping systems have been examined inseveral studies. Fraser et al. (1988) observed

47

Table 21. Average Crop Yields from

Rotation

Continuous CornCorn-Soybeans

w/Herbicides and Fertilizer Usew/Fertilizer Use Onlyw/Organic Treatment

Corn-Soybeans-Corn-Oats/Cloverw/Herbicides and Fertilizer Usew/Fertilizer Use Onlyw/Organic Treatment

Nebraska Experimental Trials

Corn

68

908784

848078

Soybeans

383735

383735

Oats

———

666361

that microbial populations increased whenmanure was applied. Sahs and Lesoing (1990)reported on soil characteristics for the Nebraskasite in a study of organic matter, phosphorous,potassium, pH, and total nitrogen measured in1987. These characteristics were examined forORGROT, HFROT, FOROT, and continuouscorn. (See Table 23). For more detail on thefour-year rotations, see Sahs and Lesoing(1985).

Estimated Costs

Production costs were estimated for variableinputs including chemicals, direct labor useand user costs of machinery. Indirect and fixedcosts of labor, management, and land were notincluded. All costs were normalized for the1990 reference year. Basic cost estimates weredeveloped from field records and Jose et al.(1989). The prices for production inputs wereassumed to be the same for the different policyscenarios. Under each cropping system, eachfield operation was charged for its labor use. Afixed cost plus operating costs were chargedfor each use of a tractor or field machine. Forthe organic treatment system, manuring costswere charged only for application. Other varia-ble costs included seed, trucking, fuel, repairs,and interest on operating expenses. Chargesfor spraying and fertilizer application were alsoincluded. Labor costs for field operations were

included in the analysis but costs associatedwith management time were not.

The results of the economic analysis reportedhere are significantly different from thosereported previously by Helmers, Langemeierand Atwood (1986). Some differences arisefrom the use of a different accounting frame-work and alternative policy scenarios. Themain differences, however, stem from the useof different underlying yield comparisons forconventional and alternative practices. Theagronomic data used for the 1986 study werebased on two separate experiments on differentfields at the University of Nebraska researchfarm at Mead. One of these experimentsfocussed primarily on conventional practices,while the other (Sahs and Lesoing, 1986 and1990) focussed on alternative croppingpractices.

For a treatment that both experimentstried—continuous conventional corn at thesame level of fertilizer use—the yields differedby as much as 50 percent. This result calls inquestion the advisability of combining datafrom the two experiments. For this reason theagronomic data for this report were derivedexclusively from the Sahs and Lesoing trials.

To derive agronomic data for the three corn-beans treatments from these experiments, we

48

Table 22. Yield Estimates for Nebraska CaseStudy Using the EPIC Model

Rotation

Continuous Corn

Corn-Beansw/Herbicides & Fertilizer

cornsoybeans

w/Fertilizer Onlycornsoybeans

w/Organic Treatmentcornsoybeans

Corn-Beans-Corn-Oats/Clover

w/Herbicides & Fertilizercornsoybeansoats

w/Fertilizer Onlycornsoybeansoats

w/Organic Treatmentcornsoybeansoats

Yield(bushels/acre)

Initial

108

13739.1

13639.1

90.437.6

14938.534.2

14838.133.8

85.638.223.1

Yr. 30

101

13438.1

13438.1

94.137.7

15039.034.8

15038.333.9

91.237.824.5

used the soybean, and corn after soybeanyields from the four-year corn-soybean-corn-oats/clover treatments. This use of the datamay overestimate yields for the corn-beanstreatments by a small amount due to the rota-tion effect, but the yield data across rotationsand treatments will be more consistent than itwould have been had we combined data fromtwo different experiments. This use of the datahas the additional advantage of allowing

comparisons of alternative treatments, as wellas alternative rotations.

Policy Analysis for Nebraska Case Study

Compared with those in Pennsylvania,Nebraska's on-farm and off-farm resource costsare low and including them does not cause ashift in the economic comparison between thethree corn-beans and the three four-year corn-beans-corn-oats/clover alternative rotations. The$20 difference in soil depreciation allowancesfor the herbicides and fertilizer using corn-beans and the organic corn-beans treatmentsdoes, however, help to narrow the marginbetween these treatments to a 2 percent differ-ence in net farm income per acre.

Not surprisingly considering Nebraska's goodsoils, its soil resource costs are small. InNebraska as in Pennsylvania, conventionaltreatments and rotations have higher deprecia-tion and higher erosion rates than alternativerotations and organic treatments—but thedifferences are less. For the conventional con-tinuous corn rotation the soil depreciationallowance is estimated at 26 percent of thegross operating margin under baseline policy.For the four-year rotation, using greenmanures and no agrichemicals, soil apprecia-tion amounts to about 4 percent of the grossoperating margin; the absolute difference,though, is only about $11 per acre per year.

The omission of resource costs for ground-water contamination, a serious problem inNebraska, may be important. However,because groundwater models cannot yet relia-bly represent the impact of various rotationsand treatments on the extent of groundwaterpollution, these costs remain unknown.

As in Pennsylvania, multilateral decouplingproduces the largest net economic value bothoverall and for each rotation. (See Figure 8 andTables 28A and 28B). Under this policy the her-bicides and fertilizer and fertilizer-only corn-beans treatments have the highest net eco-nomic value. The organic treatment trails by

49

Table 23.

Treatment

CC

HFROT

FOROT

ORGROT

CCHFROTFOROTORGROT

1987 Soil Data for Nebraska Field Trials

OrganicMatter Phosphorous

(%) (p.p.m.)

2.93 20

2.99 15

2.94 13

3.68 109

Potassium(p.p.m.)

327

352

327

564

- Conventional continuous corn- Corn-soybean-corn-oats/clover w/herbicides and fertilizer- Corn-soybean-corn-oats/clover w/fertilizer but no herbicides- Organic corn-soybean-corn-oats/clover

pH

6.38

6.70

6.82

7.03

TotalNitrogen

.161

.165

.164

.197

Table 24. Production Costs and

Treatment

Continuous CornCorn-Beans

w/Herbicides & Fertilizerw/Fertilizer Onlyw/Organic Treatment

Corn-Beans-Corn Oats/Cloverw/Herbicides & Fertilizerw/Fertilizer Onlyw/Organic Treatment

Crop Sales—Nebraska, under

TotalProduction

Costs

383

272248243

284261253

Baseline Policy

($/acre/4 years)

OperatingCosts

209

181186207

185185222

Fertilizer& Pesticide

Costs

142

6529

0

7246

0

LaborCosts

32

263236

273032

CropSales

502

773750716

634609587

50

Table 25. Input PriceNebraska

Hired LaborAnhydrous Ammonia0-46-0Diesel Fuel (less tax)Interest

Assumptions,

$6.00/hour$0.12/lb. N$0.25/lb. P2O5$0.60/gallon5.00%-real

1 percent, only $2 per acre per year. Weregroundwater contamination costs included inthe analysis, this small difference might beeliminated or reversed. It is fair to say thateven in Nebraska, this study finds organicfarming to be economically competitive undercomplete cost accounting.

The four-year rotations produce only about80 percent of the economic value of the corn-beans rotations, because substituting a year ofoats and clover for a second year of soybeans,a more profitable crop, reduces returns.

Under baseline policy, net economic value islower for each rotation and treatment thanunder decoupling. The net economic value ofthe continuous corn rotation commonly fol-lowed in Nebraska, for example, is only about30 percent of its value under the multilateraldecoupling scenario. For the other rotationsand treatments net economic value is reducedby 15 to 20 percent. Net farm incomes are alsolower for all rotations under baseline policy,except for the two corn-beans treatments withherbicides and/or fertilizer.

Net economic values for all rotations andtreatments are significantly lower under theSustainable Agriculture Adjustment Act thanunder decoupling and slightly less than underthe baseline policy scenario, primarily because

of lower predicted crop prices. (See Figure 8.)The difference between the corn-beans andfour-year rotations is much closer than underbaseline policy, but not under multilateraldecoupling, largely because four-year rotationsreceive higher support payments under SAAA.Of the policies tested, only SAAA and multi-lateral decoupling always provide incentives inline with the underlying resource economicsfor both Nebraska and Pennsylvania.

The NCA program produces the lowest neteconomic values for each rotation and treat-ment in Nebraska. Relative to the decouplingscenario, government payments are higher andnet economic value is lower. In Nebraska,where the alternative four-year rotationincludes all program crops, the NCA optionimproves financial and economic comparisonsto conventional rotations, relative to the com-parisons under baseline policy. In Pennsylva-nia, however, where the alternative rotationsinclude nonprogram crops, a farmer would beforced to choose between crop sales or pro-gram payments on acreage under nonprogramcrops. For this reason, the NCA program asrecently formulated and represented here, willbe less effective than either multilateraldecoupling or the SAAA option in removingbiases against resource-conserving farmingpractices.

The 25 percent input tax has a significantimpact on the relative profitability of the treat-ments, but not of the rotations. For the corn-beans treatments, the 25 percent tax makes theherbicides and fertilizer treatment the leastprofitable. The fertilizer-only treatment is stillthe most profitable, but the margin betweenthat and the organic treatment is reduced toless than $1 per acre per year. A tax of 11 per-cent would make the herbicides-fertilizer andorganic corn-beans treatments equallyprofitable.

51

III. Summary of Policy Conclusions

S everal key conclusions can be sum-marized from the preceding analysesof the Pennsylvania and Nebraska

case studies:

1. Farm support mechanisms that transferincome through commodity programs createdistortions that encourage dependence on inor-ganic inputs and discourage sustainable agricul-tural practices. Baseline agricultural policiesreduce the net economic value of all practicescompared to multilateral decoupling.

2. A policy of multilateral decoupling, withfarm income support provided through meansnot linked to the commodity programs, couldremove the distorting influence of commodityprograms and greatly encourage agriculturalsustainability, while at the same time reducingfiscal costs.

3. An agrichemical input tax could encouragelower levels of input use, and where economi-cally viable alternatives exist, could cause ashift to alternative agricultural practices.

4. Adaptations to baseline agricultural policywhich allow flexibility in crop production couldgo far towards encouraging sustainable prac-tices. However, net economic value resultingfrom these alternative policies would mostlikely be less than that for the multilateraldecoupling option.

5. When "conventional" and "alternative"farming systems are evaluated with completeaccounting for their on-farm and off-farmenvironmental costs and without the distortingeffects of baseline agricultural policies, farmingsystems that make maximum use of rotationsand biological nutrients are economically com-petitive even where environmental costs arelow, and markedly superior where environ-mental costs are high.

6. Shifting toward these farming systemsthrough appropriate policy changes can raiseagricultural productivity, reduce the fiscal costsof maintaining farm incomes, and lowerenvironmental costs in agriculture. These policychanges can greatly reduce America's farm bill.

Paul Faeth is an Associate in the World Resources Institute's Program in Economics and Technologywhere he directs WRI's project on the Economics of Sustainable Agriculture. Previously, he workedat the International Institute for Environment and Development and the USDA's Economic ResearchService. Robert Repetto is Director of the Program in Economics and Technology at the WorldResources Institute. Formerly, he was an associate professor of economics in the School of PublicHealth at Harvard University and a member of the economics faculty at Harvard's Center for Popu-lation Studies. Kim Kroll is an agricultural systems modeler at the Rodale Research Center. Beforejoining Rodale's staff in 1987 he was a visiting professor at Rutgers University. Qi Dai is a researchassociate in the Department of Agricultural Economics at Purdue University where he recently com-pleted his Ph.D degree. Glenn Helmers is a Professor in the Department of Agricultural Economicsat the University of Nebraska.

53

Table 26A. Summary Results—Pennsylvania—Transition PeriodNormal Period

Policy

Gross Operating BaselineMargin SAAA

NCAMLDC25% Tax

-Soil Depreciation BaselineSAAANCAMLDC25% Tax

Net Farm Operating BaselineIncome SAAA

NCAMLDC25% Tax

-Off-Site Costs BaselineSAAANCAMLDC25% Tax

Net Economic Value BaselineSAAANCAMLDC25% Taxa

Net Economic Valiu($/acre/10 years)

Conventional TillageCC

(47)(118)(118)631

(168)

231222222285231

(278)(340)(340)346

(399)

641641641705641

(919)(981)(981)(359)(919)

CC - Conventional ContinuousCCBCB - Conventional Corn-Beans

CCBCB

607461461959523

230215215246230

377247247712293

438438438462438

(61)(191)(191)251(61)

Corn

ACG - Alternative Cash Grain—Organic

ACG ACGF

486461235734486

(26)(24)(24)(28)(26)

512485259762512

304323295323304

208162(37)438208

508492294639508

(78)(73)(73)(77)(78)

587565367716587

242250231250242

345315136466345

CC

(75)(146)(146)603

(196)

228218218282228

(302)(364)(364)322

(424)

494494494543494

(796)(858)(858)(222)(796)

Plus Present Value of

ReducedCCBCB

581437437934497

222207207241222

359230230694275

382382382403382

(23)(152)(152)290(23)

ACG

480455229728480

(34)(32)(32)(37)(34)

514487261766514

250265244265250

264222

17500264

TillageACGF

501485287632501

(95)(90)(90)(93)(95)

596574376725596

183190175190183

413384202536413

the

ALL HAY

247247247247247

(45)(45)(45)(45)(45)

292292292292292

5050505050

243243243243243

corn-barley/soybean-wheat/clover-corn-soybeanACGF - Alternative Cash Grain w/Fodder—Organic corn-beans-wheat/clover-clover-corn silage

SAAA - Sustainable Agriculture Adjustment ActNCA - Normal Crop AcreageMLDC - Multilateral Decoupling

a. Columns will not add for the input tax, as the amountmine the Net Economic Value.

of tax has been added back to deter-

54

Table 26B . Summary Results—Pennsylvania—Transition PeriodNormal Period

Policy


NCAMLDC25% Tax

-Soil Depreciation Baseline

Net FarmIncome

SAAANCAMLDC25% Tax

Operating BaselineSAAANCAMLDC25% Tax

+ Government BaselineCommodity SAAASubsidy

Net Farm

CCCCBCB -ACG -ACGF -

SAAA -NCA -MLDC -

NCAMLDC25% Tax

Income BaselineSAAANCAMLDC25% Tax

Net Farm Income($/acre/10 years)

Conventional TillageCC (

(47)(118)(118)631

(168)

231222222285231

(278)(340)(340)346

(399)

547608608

—547

269268268346147

Conventional ContinuousConventional Corn-Beans

CCBCB

607461461959523

230215215246230

377247247712293

328366366

—328

706612612712622

Corn

Alternative Cash Grain—OrganicAlternative Cash Grain w/Fodder

ACG

486461235734486

(26)(24)(24)(28)(26)

512485259762512

315407608

—315

827892867762827

ACGF

508492294639508

(78)(73)(73)(77)(78)

587565367716587

192541312

—192

7791106679716779

CC

(75)(146)(146)603

(196)

228218218282228

(302)(364)(364)322

(424)

547608608

—547

244245244322123

Plus Present Value of

ReducedCCBCB

581437437934497

222207207241222

359230230694275

328366366

—328

687596596694603

ACG

480455229728480

(34)(32)(32)(37)(34)

514487261766514

315407608

—315

829894869766829

TillageACGF

501485287632501

(95)(90)(90)(93)(95)

596574376725596

192541312

—192

7881115688725788

the

ALL HAY

247247247247247

(45)(45)(45)(45)(45)

292292292292292

000

—0

292292292292292

corn-barley/soybean-wheat/clover-corn-soybean—Organic corn-beans-wheat/clover-clover-corn silage

Sustainable Agriculture Adjustment ActNormal Crop AcreageMultilateral Decoupling

55

Table 27A . Summary Results—Pennsylvania—Transition Period

Policy


NCAMLDC25% Tax

-Soi l Depreciation Baseline

Net FarmIncome

-Off-Site

SAAANCAMLDC25% Tax


Costs BaselineSAAANCAMLDC25% Tax

Net Economic Value Baseline


SAAA -NCA -MLDC -

SAAANCAMLDC25% Tax£

Net Economic Value($/acre/5 years)

Conventional TillageCC <

(108)(143)(143)224

(173)

124119119153124

(232)(262)(262)

71(297)

343343343378343

(575)(605)(605)(307)(575)


ZCBCB

225154154398181

123115115132123

1033939

26658

235235235247235

(132)(196)(196)

19(132)

Corn

Alternative Cash Grain—Organic

ACG ACGF

6150

(70)16861

(14)(13)(13)(15)(14)

7563

(57)18375

163173158173163

(88)(110)(215)

10(88)

9281(7)

14892

(42)(39)(39)(41)(42)

13412032

189134

129134124134129

5(14)(92)555

CC

(123)(158)(158)209

(188)

122117117151122

(245)(275)(275)

58(310)

265265265291265

(510)(540)(540)(233)(510)

ReducedCCBCB

212141141385167

119111111129119

933030

25648

205205205216205

(112)(175)(175)

40(112)

ACG

5847

(73)16558

(18)(17)(17)(20)(18)

7664

(56)18576

134142131142134

(58)(78)

(187)43

(58)

TillageACGF ALL HAY

8877

(11)14488

(51)(48)(48)(50)(51)

13912537

194139

9810294

10298

4123

(57)9241

5454545454

(24)(24)(24)(24)(24)

7878787878

2727272727

5151515151

corn-barley/soybean-wheat/clover-corn-soybeanAlternative Cash Grain w/Fodder—Organic corn-beans-wheat/clover-clover-corn silage


a. Since the tax applied to fertilizerswas added back.

and pesticides is a transfer payment, the value of the tax

56

Table 27B . Summary Results—Pennsylvania—Transition Period

Policy


NCAMLDC25% Tax


Net FarmIncome

SAAANCAMLDC25% Tax



Net Farm


SAAA -NCA -MLDC -

NCAMLDC25% Tax

Income BaselineSAAANCAMLDC25% Tax


Conventional TillageCC CCBCB

(108)(143)(143)224

(173)

124119119153124

(232)(262)(262)

71(297)

293326326

—293

61646471(4)


226154154398181

123115115132123

1033939

26658

176196196

—176

279235235266234

Corn

Alternative Cash Grain—Organic

ACG ACGF

6150

(70)16861

(14)(13)(13)(15)(14)

7563

(57)18375

182218326

—182

257281269183257

9281(7)

14892

(42)(39)(39)(41)(42)

13412032

189134

123290167

—123

257410199189257

CC

(123)(158)(158)209

(188)

122117117151122

(245)(275)(275)

58(310)

293326326

—293

48515158

(17)

ReducedCCBCB

212141141385167

119111111129119

933030

25648

176196196

—176

269226226256224

ACG

5847

(73)16558

(18)(17)(17)(20)(18)

7664

(56)18576

182218326

—182

258282270185258

TillageACGF

8877

(11)14488

(51)(48)(48)(50)(51)

13912537

194139

123290167

—123

262415204194262

ALL HAY

5454545454

(24)(24)(24)(24)(24)

7878787878

000

—0

7878787878

corn-barley/soybean-wheat/clover-corn-soybeanAlternative Cash Grain w/Fodder—Organic corn-beans-wheat/clover-clover-corn silage


57

Table 28AL. Summary Results—Nebraska

Policy


NCAMLDC25% Tax


Net FarmIncome

-Off-Site

SAAANCAMLDC25% Tax


Costs BaselineSAAANCAMLDC25% Tax

Net Economic Value Baseline

CCHFCBFOCBORGCBHFROTFOROTORGROTSAAANCAMLDC

SAAANCAMLDC25% Tax3

CC

1199999

30583

3130303831

887070

26753

1616161716

725454

25072

Net Economic Value($/acre/4 years)

HFCB

501445445583485

1211111312

489434434571473

999

109

480425425561480

- Conventional continuous corn

RotatioiI

FOCB ORGCB HFROT

503449449582495

1110101211

492439439570485

999

109

483430430561483

- Conventional corn-beans, w/herbicides anc- Corn-beans w/fertilizer- Organic corn-beans

?ut no herbicides

473422422551473

(8)(8)(8)

(10)(8)

482430430561482

88888

474422422553474

fertilizer

- Corn-beans-corn-oats/clover w/herbicides and fertilizer- Corn-beans-corn-oats/clover w/fertilizer bui- Organic corn-beans-corn-oats/clover

- Sustainable Agriculture- Normal Crop Acreage- Multilateral Decoupling

a. Since the tax applied to fertilizerswas added back.

Adjustment Act

and pesticides is a

351341299461332

(5)(5)(5)(6)(5)

356346304467338

88888

348338296458348

no herbicides

transfer payment,

FOROT

348338298452336

(4)(4)(4)(5)(4)

352342302457340

88888

344334294449344

the value

ORGROT

334325286436334

(12)(11)(11)(15)(12)

346337297451346

66666

340331292445340

of the tax

58

Table 28B . Summary Results—Nebraska

Policy


NCAMLDC25% Tax


Net FarmIncome

SAAANCAMLDC25% Tax



Net Farm

CCHFCBFOCBORGCBHFROTFOROTORGROT

SAAANCAMLDC

NCAMLDC25% Tax

Income BaselineSAAANCAMLDC25% Tax3

CC

1199999

30583

3130303831

887070

26753

199222222

-199

287291291267252

- Conventional continuous- Conventional corn-beans,


RotationHFCB FOCB ORGCB HFROT

501445445583485

1211111312

489434434571473

100111111

-100

589545545571572

corn

503449449582495

1110101211

492439439570485

100111111

-100

592550550570584

w/herbicides and- Corn-beans w/fertilizer but no- Organic corn-beans

herbicides

473422422551473

(8)(8)(8)

(10)(8)

482430430561482

100111111

-100

581541541561581

fertilizer

- Corn-beans-corn-oats/clover w/herbicides and fertilizer- Corn-beans-corn-oats/clover w/fertilizer but- Organic corn-beans-corn-oats/clover

- Sustainable Agriculture Adjustment Act- Normal Crop Acreage- Multilateral Decoupling

a. Columns will not add for themine the Net Economic Value

input tax, £

351341299461332

(5)(5)(5)(6)(5)

356346304467338

100185222

-100

455531526467437

no herbicides

is the amount of tax has

FOROT

348338298452336

(4)(4)(4)(5)(4)

352342302457340

100185222

-100

451527524457440

been added back

ORGROT

334325286436334

(12)(11)(11)(15)(12)

346337297451346

100185222

-100

445521519451445

to deter-

59

Appendix

The off-site costs reported inacreage/ and so dosion. We assumed 1sion rate would beshown below. Thetion of the crops in

PennsylvaniaContinuous CornCorn-Beans (CCBCB)

APPENDIX A

Calculation

Tables 4 and 5not necessarily equal the

that the set-aside acreage

of Off-Site Costs

are weighted accordingerosion rate times the

to the amount of set-asideaff-site cost per ton of ero-

would be planted in a cover croplow, similar to that for All Hay. The calculationsset-aside

for theseacreage used here is the average over the rotation

the rotation and the number of seasons the crop

Soil[ Erosion

(t/ac/yr)

[9.26[6.07

Alternative Cash Grain [4.25ACG w/FodderAll Hay

NebraskaContinuous CornCorn-Beans (CBCB)Corn-Beans-Corn-

Oats/Clover

[3.29[0.66

[6.5[3.7[3.1

x (1-Set-aside)

(ac/ac)

x (1-0.10)x (1-0.06)x (1-0.07)x (1-0.03)x (1-0.00)

x (1-0.10)x (1-0.05)x (1-0.0625)

All Hay+ Erosion x Set-aside ]

(t/ac/yr) (ac/ac)

+ (0.66 x 0.10)]+ (0.66 x 0.06)]+ (0.66 x 0.07)]+ (0.66 x 0.03)]+ (0.66 x 0.00)]

+ (0.66 x 0.10)]+ (0.66 x 0.05)]+ (0.66 x 0.0625)]

occupies

and that its ero-jstimates areand is a func-

in the rotation.

Erosion Off-Farmx Damages = Erosion Cost

($/t)

x 8.16x 8.16x 8.16x 8.16x 8.16

x 0.67x 0.67x 0.67

a. Set aside percentages used were: corn, 10%; wheat, 5%; soybeans, 0%; barley, 10%;

($/ac/yr)

694732265

4.02.32.0

and oats, 5%.

61

APPENDIX B

Calculation of Soil Depreciation Allowance

The following formula was used to estimate the soil depreciation allowance (SDA):

SDA = [(Yo-Yn)/(n/RL)] * Pc * {[ 1 - 1/(1 + i)n]/i},

where Yo is initial yield,Yn is final yield,RL is rotation length,n is period under consideration,Pc is crop price, andi is real interest rate.

For rotations that include more than one crop, each crop was weighted according to its acre-age in the rotation, and these weighted crop depreciation allowances were added to determinethe allowance for the rotation as a whole. When comparing rotations of different lengths, therotation with the longest period was used to calculate the depreciation allowance for allrotations.

The following example for the Pennsylvania Corn-Bean (CCBCB) rotation will serve toillustrate.

* o, corn

Yo, soybeans

n, corn

Y1 n, soybeans

RLn^ cornp

soybean

= 5,= 30,= 2.05,= 5.80,= 0.05.

(From Table(From Table(From Table(From Tabledefineddefined(From Table(From Tableassumed

14, estimated using EPIC)14, estimated using EPIC)14, estimated using EPIC)14, estimated using EPIC)

7, estimated by FAPRI)7, estimated by FAPRI)

SDAco

bDA S O yt> e a n s

SDA•rotation, annual

= [(55.6-45.6)/6]

= [SDAcorn * 3/RL][105 * (3/5)]

= SDArotation

/RL

2.05 *5.80 *

{[1 - .05)30]/.05}{15.4}

+ [SDA soybean * 2/RL]+ [149 * (2/5)]

= 123/5

105149

123

24.6

62

Notes

1. Derived from U.S. Department of Commerce(1984-90).

2. However, groundwater pollution problemsare serious in Nebraska. Nitrate levels nearor above EPA's limit for drinking water havebeen identified in water supplies of nearlyone of five rural communities. Smallamounts of the pesticide atrazine have beenfound in water supplies in the irrigatedareas of the Platte River Valley (Aiken,1990). These costs are not included in thecomparisons.

3. See for example: Cacek and Langner, 1986;Dobbs, Leddy, and Smolik, 1988; Domanico,Madden, and Partenheimer, 1986; Goldsteinand Young, 1987; Helmers, Langemeier, andAtwood, 1986; Lockeretz et al., 1984.

4. The effect of past erosion on productivityhas been demonstrated empirically. Forexample, in Indiana, Schertz et al. (1989)showed productivity losses of 15 percent

and 24 percent for corn and soybeans, forseverely eroded soils as compared withslightly eroded soils.

5. For additional information and regional casestudies, see also Waddell (1985).

6. For an analysis of a working farm usingsimilar practices, see National ResearchCouncil, 1989.

7. Crop yields for 1990 are reported in Figures12 and 14 but because of their late availabil-ity have not been included in the analysis.

8. A conventional financial analysis using theRRC agronomic data set was done by Han-son et al. (1990). They found that for a750-acre representative farm during the tran-sition period (1981-84), profits were signifi-cantly lower for the alternative cash grainrotation than for the conventional rotation.After the transition period (1985-89), thealternative rotation was more profitable.

63

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