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OCR for page 195
4
Economic Evaluation of
Alternative Farming Systems
| NTEREST IN AUERNATIVE FARMING SYSTEMS iS often motivated by a desire to
reduce health and environmental hazards and a commitment to natural
resource stewardship. But the most important criterion for many farmers
considering a change in farming practices is the likely economic outcome.
Wide adoption of alternative farming methods requires that they be at
least as profitable as conventional methods or have significant nonmonetary
advantages, such as preservation of rapidly deteriorating soil or water re-
sources. Economic performance can be improved in several ways:
Lowering ner unit expenditures on production inputs;
~ o r -- ~ -r ~ -- - r -
Increasing output per unit of input;
Producing more profitable crops and livestock;
Reducing capital expenditures on machinery, irrigation equipment, and
buildings;
Reducing natural crop and animal losses;
Reducing income loss through commodity price fluctuations; and
Making fuller use of available land, labor, and other resources.
Several economic analyses of alternative farming systems were conducted
in the 1970s. A review found most of these studies were methodologically
flawed, however, and used prices, technologies, and policies that are of
limited relevance today (Lockeretz et al., 1984~. In particular, energy and
land values have fallen, real interest rates have risen, inflation has slowed,
cash market commodity prices have generally declined beginning in 1982,
and a wide range of government policies have exerted greater influence on
farmer decision making. These factors are dynamic and constantly influence
agricultural producers and policies.
Nonetheless, a growing body of contemporary data supports the eco-
195
OCR for page 196
196
ALTERNATIVE AGRICULTURE
nomic viability of alternative farming practices and systems. The committee
reviewed and interpreted available literature on the economics of alternative
methods and systems, focusing on the general areas of pest control, ~liver-
sification, nutrient sources, and the effect of government and market price
structures on the adoption of alternative practices. Economic findings from
the case study farms are presented in this chapter.
ECONOMIC ASSESSMENTS OF ALTERNATIVE METHODS
Understanding the overall economic implications of alternative farming
systems requires research at several levels, including individual components
of crop and livestock enterprises, whole-farm studies, and national and
international analyses.
Traditionally, most evaluations of the economic impact of adopting alter-
native farming practices have focused principally on the cost and returns of
adopting a specific farming method. For example, many studies at the farm
level have estimated the economic benefits of integrated pest management
(IPM), crop rotations, and manure management options. Such studies gen-
erally assume no other changes in the farm operation, input or output, or
prices. These studies fall into a broader literature on farm management that
employs partial budget analysis techniques.
Fewer studies have considered the impact of alternative farming systems
on the economic performance of the whole farm. At the aggregate level, the
committee could identify no useful studies of the potential effects of wide-
spread adoption of alternative agricultural systems.
Most aggregate studies are flawed in their methods and assumptions
regarding the effectiveness of alternative systems and the impact of com-
modity policy on farm management. The common approach has been to
compare conventional farming practices with the economic performance of
a similar farm, assuming total withdrawal of certain categories of farm
inputs. These studies usually assume or project substantial reductions in
per acre yields in many crops and then project the effect of these reductions
in the context of strong export demand and limited commodity supplies.
These assumptions and conditions often result in projected food production
shortfalls that do not accurately reflect the constant change of markets or
the production capabilities of many available alternative systems. The com-
mittee could identify no aggregate studies that compare the costs and
benefits of conventional agriculture with successful alternative systems.
Such analyses are needed but wig be complex, involving a wide range of
factors.
Economic Stubbles of Farming Practices
Economic analyses of single enterprises or their components usually em-
ploy partial budgeting techniques that estimate the change in production
costs, profits, and risks accompanying a specific change in farming practice
OCR for page 197
ECONOMIC EVALUATION
197
(BoehIje and Eiuman, 1984~. Results are often expressed as a change in the
net return over cash production costs per acre or per unit of output. Meth-
odologicaBy, partial budget studies focus on short-term net returns, includ-
ing labor, and generally do not take into account off-farm impact or long-
term changes in the productivity of the natural resource base. They also
assume no change in farm size, enterprise combinations, prices of commod-
ities or inputs, or other variables.
Despite these limitations, this method is practical and easy to understand.
Partial budget Study findings can be augmented by drawing on additional
analyses from specialists in biology, ecology, and physical science. In recent
years, biological, physical, and social scientists have made much progress
in their collaborative research efforts in developing new methodologies for
estimating the economic consequences of farming systems and practices.
Partial budgeting is reported to be the most widely used method of
estimating changes in income of an indiviclual farm as a result of adopting
IPM (ADen et al., 1987; Osteen et al., 1981~. The landmark research on the
economics of crop rotations by Heady (1948) and Heady and Jensen (1951)
was based essentially on the partial budgeting approach, because the only
aspect of the farm operation assumed to vary was the crop rotation. Con-
temporary research that includes a greater consideration of biological and
. ~ ~ ~
· , . · . . . . · . · . — · , ~ . . . . .
economic factors IS presented later in this discussion (molested and Young,
1987; Helmers et al., 1986~. The review by Allen et al. (1987) of the agricul-
tural, economic, and social effects of TPM is another example of the multi-
disciplinary approach to partial budgeting analysis.
Whol - Farm Analysis of Alternative Methods
Frequently, a farming method that appears profitable when analyzed at a
component level may prove less attractive from the perspective of the whole
farm, particularly in relation to other possible practices or combinations of
practices.
Analysis at the whole-farm level recognizes that a farmer's decision to
aclopt one or more farming practices is not made in isolation from the rest
of the farm enterprise. Perhaps the most important factor in adopting any
management system or combination of crops is the net return to the farm
family. The successful commercial farmer must assess the compatibility of
proposed alternative practices with other practices already in place, taking
into account a farm's physical and biological resources and anticipated
changes in crop yields, livestock productivity, production costs, farm pro-
grams and policy, and labor and machinery requirements. These and other
factors will strongly affect the farm operator's cash flow and the farm's
profitability and long-term economic viability.
Whole-farm studies typically use one of two approaches: linear budget
(risk programming) or overall farm surveys. Both approaches attempt to
examine the effect of different farming practices or production systems at
the farm level, taking into account aD components of the farming system
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198
ALTERNATIVE AGRICULTURE
and operation, such as land-use patterns, pest control practices, and nutri-
ent management.
Microeconomic programming or planning models analyze farm decision
making based on particular resource and financial assumptions as wed as
estimated relationships between management choices and crop or animal
production levels. The usefulness and validity of these models depend on
the availability of reliable experimental or empirical data on input and
output relationships in specific agricultural systems. When such data are
~ , ~ _
. . . ~ . · . . · a ~
present, whole-tarm planning models can analyze tne economic conse-
quences of a wide range of alternative production systems. A principal
objective of the committee's research recommendations is the development
of such a knowledge and information base (see the Executive Summary).
Partial- and whole-farm analyses can take a short- or long-term perspec-
tive. For short-term analyses, some resources and technologies are assumed
fixed, and management decisions are made among existing alternatives.
Long-term studies are more complex and difficult because many more vari-
ables are changeable, including technologies and policies. A critical need
identified by the committee is expanded multidisciplinary research on Tong-
term technological trends and policy changes and how these trends and
changes are likely to influence the relative costs and benefits of various
farming systems. For example, the committee suspects that biotechnology
will greatly increase technological options in support of alternative agricul-
tural systems, and that society's environmental and public health goals will
tend to support producers successfully adopting these technologies. The
committee cannot go further in quantifying these trends, however, because
the necessary knowledge base and analytical framework do not exist.
Farm surveys are based on empirical measures of the performance of
agricultural production systems. It is often difficult to draw cause and effect
inferences from surveys, however. For example, farm operators' (echnologi-
cal choices and management abilities greatly influence profitability. But it is
difficult to separate the contribution of technology from that associated with
managerial skis. Nonetheless, the performance of agricultural systems as
captured in well-designed surveys implicitly reflects the interaction of these
factors. Experimental data on alternative agricultural systems are clearly
lacking, and relatively few weD-designed surveys have been undertaken.
The literature is beginning to grow, however, and a number of solid studies
have reached conclusions indicating the prospective economic benefits of
alternative production systems.
The Transition to Alternatives
Most economic studies of alternative production at the whole-farm level
take a static approach, ignoring the year-to-year difficulties associated with
the transition from one system to another. Moreover, the assumptions used
generally ignore uncertainty stemming from the weather, crop yields, man-
OCR for page 199
ECONOMIC EVALUATION
199
agement skills, prices of inputs and products, government policies, and
other variables. As a result, these studies must be interpreted cautiously.
Several whole-farm studies have examined the financial impact of chang-
ing from conventional to alternative farming practices (Hall, 1977; Osteen
et al., 1981; Reichelderfer and Bender, 1979~. These studies recognize that a
farm's economic performance can change significantly during a multiyear
evolution from conventional to alternative practices (Dabbert and Madden,
1986~.
Many factors can influence the economic performance of farms during the
transition to alternative practices. The use of certain kinds of pesticides and
fertilizers may have disrupted natural predators and other biota. Reesta-
blishing these populations and the balance among them can occur quickly
or require several years (Koepf et al., 1976; U.S. Department of Agriculture,
1980~. Although crop rotations will generally increase yields, decrease pes-
ticide costs, and, in the case of legumes, decrease fertilizer costs, the full
benefits of crop rotations may take several years to materialize. Depending
on the prices of farm commodities and inputs, adoption of a rotation some-
times reduces net farm income, particularly during the initial years of a
transition (Dabbert and Madden, 1986~. For example, including a forage
legume in a rotation may not sufficiently decrease production costs and
increase the yields of cash grain crops to compensate for the reductions in
their acreage especially when cash grain prices are supported far above
market levels (Duffy, 1987; Goldstein and Young, 1987~. Farmers may also
need a few years of experience to acquire the additional knowledge and
management skills necessary for more diversified operations. The economic
impact of a farmer's decision to change from conventional to alternative
farming methods on all or part of a farm operation will vary depending on
factors such as climate, soil type, crops and livestock produced, cropping
history of the farm, the farmer's skills, and many other considerations.
Because of these factors, most farmers adopt alternatives gradually. A1-
though the transition may be difficult, successful alternative systems tend
to reduce variability of net returns (Helmers et al., 1986~. The consistency
of yield and return to the farm family is a potential benefit of alternative
agriculture that deserves further study.
Comparative Regional Cost of Production
Production cost per unit of output is one of the most important short-
term measures of the economic performance of an agricultural operation,
production system, or sector. Comparing per unit production costs for a
given crop by region is a good indicator of regional absolute advantage or
the inherent suitability of an area or farm for the profitable production of a
given crop.
Another common measure production costs per acre is widely used in
comparative analyses. This measure, however, differs significantly from per
unit production costs. Per acre costs do not take into account the actual
OCR for page 200
200
ALTERNATIVE AGRICULTURE
TABLE 4-' Regional per Bushel and per Acre Production Cost Estimates and
Yields, 1986
Crop
Corn Belt-
Great Lakes Southeast
Corn
Total variable costs (dollars)
Per bushel 0.93 1.81
Per acre 118.68 120.15
Yield/acre (bushels) 126 66
Soybeans
Total variable costs (dollars)
Per bushel 1.31 3.15
Per acre 49.93 67.89
Yield/acre (bushels) 37 21
NOTE: The Corn Belt and Great Lakes region includes Minnesota, Wisconsin, Michigan, Iowa,
Missouri, Indiana, Illinois, and Ohio. The Southeast region includes Kentucky, Tennessee,
Alabama, Georgia, South Carolina, North Carolina, and Virginia.
SOURCE: U.S. Department of Agriculture. 1987. Economic Indicators of the Farm Sector—Costs of
Production, 1986. ECIFS 6-1. Economic Research Service. Washington, D.C.
yields harvested; they reflect the level of inputs applied on a per acre basis.
Consequently, per acre production costs do not as accurately reflect the
productivity of a cropping system or an area for a particular crop. Likewise,
high per acre costs for fertilizer and pesticides do not necessarily indicate
high per unit costs or low productivity. For example, farmers in highly
productive corn-growing regions generally use more fertilizer and other
inputs per acre because they can afford it based on the high yields they will
achieve, not because the area is unsuited to corn production. This is partic-
ularly true when market or government support prices are high.
In contrast to the limitations of per acre costs, per bushel costs are good
indicators of an area's suitability for production of a given crop. The exam-
ple in Table 4-1 shows this and indicates the superiority of per unit produc-
tion cost figures in defining the productivity of regions. The Corn Belt-
Great Lakes region is highly suited to corn and soybean production in terms
of rainfall, soils, and temperature, particularly in contrast to the Southeast
region. Per acre production cost estimates, however, do not reveal this
advantage as clearly as per unit production costs do; the total per acre
variable costs are similar for these regions. The same costs expressed on a
per bushed basis, however, show that it requires far less cash expenditure to
produce a bushel of corn or soybeans in the Corn BeTt-Great Lakes region
than in the Southeast. Table 4-2 shows total variable costs and fertilizer and
pesticide cost estimates per unit of production for various regions produc-
ing corn, soybeans, and hard red winter wheat.
Per unit production costs reflect what actually happens during a given
growing season. Many things, such as too much or too little rain, cold
OCR for page 201
201
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OCR for page 202
202
ALTERNATIVE AGRICULTURE
spells, pests, hail, or soil fertility problems, can affect productivity in farm-
ing. These factors, as well as diverse soil types, climates, and levels of pest
infestation, often account for large regional differences in per unit costs for
a given crop, despite fairly similar per acre production costs.
Increased efficiency and lower per unit production costs are essential for
agricultural producers to remain competitive in domestic and international
markets. Alternative systems can often help achieve these goals. To better
understand the role and viability of specific alternative agriculture systems,
however, far greater knowledge of regional differences in production costs,
their variability, and their causes is needed. Such understanding will help
· Explain how and why some farmers within regions and in different
regions of the country can produce a given crop at markedly lower per
unit costs than their neighbors or producers in other regions;
· Identify the production cost advantages and disadvantages stemming
from soil, water, weather, pests, and other natural factors;
Target technologies, management approaches, and policy decisions that
most effectively reduce these costs and make the most of regional ad-
vantages; and
Better understand how commodity, conservation, regulatory, and other
policies influence on-farm management decisions and production costs.
methods for Comparing Production Costs
A variety of farm accounting systems and methods can be used to calcu-
late per acre and per unit production costs. Most farmers use some system
of recor~keeping to track expenditures and determine profits and losses at
the end of each season.
Most states and the U.S. Department of Agriculture (USDA) collect and
analyze farm budget data. A variety of private organizations have devel-
oped recor~keeping systems that farmers can use for estimating cash flow,
working with lenders, tracking returns to certain investments, identifying
areas where profits could be increased, and preparing income tax state-
ments. Some lenders require these records. Many of these recor~keeping
systems are very sophisticated and have been used to study the distribution
of per acre and per unit production costs for major commodities. The
quality of individual farmers' recor~keeping, however, has a great effect on
the quality of the data reported. The committee has reviewed several farm
budget and cost of production studies, including Southwestern Minnesota
Farm Business Management Association data, Southwest Kansas Farm
Management Association data, and data compiled and published by the
USDA.
Reports by these and other organizations use a variety of different meas-
ures, assumptions, and formats in collecting, analyzing, and reporting data.
They are not random samples and do not generally employ sampling tech-
niques. As a result, care must be exercised in drawing inferences from data
OCR for page 203
ECONOMIC EVALUATION
203
and findings associated with different data sets. To the extent possible, the
USDA tries to use consistent definitions and accurate methods in its pub-
lished reports on state average production costs. The level of aggregation
reported, however, masks much of the variability within states in the costs
incurred on incliviclual farms.
Additional insights can be extracted from analyses of comparative pro-
duction costs on particular groups of farms within a given region. A com-
mon analytical approach is to separate a sample of farms producing a given
crop into groups based on a given indicator or particular farm characteristic.
The results of one such analysis of drylanct wheat farms in southwest
Kansas are shown in Table 4-3.
The sample of 3,000 farms was divided into quartiles by income. The first
column in the table reports average yields, costs, and acreage for the 750
farms or 25 percent—reporting highest income; the second column reports
the same information for the 750 farms reporting the lowest income.
These data show
Low-income farms incur per unit production costs nearly twice those of
high-income farms ($3.66 versus $1.87 per bushel).
The yields on low-income farms are about 9 percent less than on the
high-income farms even though the per bushel production costs are
almost double.
All variable costs per acre were greater on the low-income farms. The
per acre differential was greatest for machinery hire ($7.57), fertilizer
($7.53), machinery repair ($6.02), and herbicides and insecticides ($5.28~.
Insights into the potential benefits of certain alternative production sys-
tems arise from identifying the cost factors that tend to distinguish high-
income low-cost producers from less profitable but otherwise similar farms.
Some important factors contributing to higher per acre costs in Kansas
wheat production and corn and soybeans grown in southwest Minnesota
are summarized in Table 4-4. The difference in fertilizer and pesticide per
acre and per bushel production cost for high-cost and low-cost corn and
soybean farms in Minnesota are presented in Table 4-5. Per bushel fertilizer
and pesticide costs were 144 percent greater for high cost soybean farms in
1986 and 60 percent greater on corn farms in 1987. Variable costs associated
with machinery and repairs are also consistently high on low-income farms,
in part because these farms are smaller on average and machinery costs are
spread over fewer acres. These data are consistent with national average
cost of production data for major crops (Table 4-6~.
Alternative Agriculture and Production Costs
Alternative production systems are designed to enhance beneficial biolog-
ical interactions and improve economic performance through better nutrient
management and pest control. When successfully adopted, most alternative
systems greatly influence fertilizer and pest management costs (see all case
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204
ALTERNATIVE AGRICULTURE
TABLE 4-3 Cost of Production for Dryland Wheat in Southwest Kansas, 1986
-
25 Percent of Farms 25 Percent of Farms
with Highest Income with Lowest Income
Costs (per acre) (per acre)
Crop production costs
Hired labor $ 4.02 $ 4.35
Repairs 8.90 14.92
Seed crop insurance 2.17 3.18
Fertilizer-lime 2.62 10.15
Machine hire 8.09 15.66
Storage-marketing 1.68 3.97
Fees-conservation-auto expenses 1.06 3.14
Gas-fuel-oil 6.91 9.99
Personal property tax 0.27 0.46
General insurance 0.45 1.13
Utilities 1.31 2.27
Herbicide-insecticide 1.19 6.47
Interest on operating costs (12%) 3.48 6.81
Interest on machinery
investment (12%) 3.62 5.31
Total operating costs $ 45.77 $ 87.81
Depreciation
Motor vehicles $ 13.01 $ 12.69
Machinery 3.98 9.13
Buildings 1.50 5.01
Total depreciation $ 18.49 $ 26.83
Total production costs $ 64.26 $114.64
Total production costs/bushel $ 1.87 $ 3.66
Management, labor, and land costs
Management chargea $ 4.17 $ 3.81
Operation, unpaid labors 10.12 20.44
Land charge' 27.82 25.40
Total management, labor, land costs $ 42.11 $ 49.65
Total management, labor, land costs/
bushel $ 1.23 $ 1.58
Total costs $106.37 $164.29
Total costs/bushel $ 3.10 $ 5.24
Wheat acres 1,482 734
Wheat yield/acre (bushels) 34.35 31.36
. .
as percent of yield per acre times $2.43 per bushel.
b$15J000 per operator divided by wheat acres.
C33.33 percent of yield per acre times $2.43 per bushel.
SOURCE: B. L. Flinchbaugh, Kansas State University, correspondence, 1988.
OCR for page 205
ECONOMIC EVALUATION
TABLE 4-4 Major Inputs Resulting in Higher per Acre Costs: High-Cost
Farms Versus Low-Cost Farms, Selected Studies
205
Difference In Variable Costs Between High- and Low-Cost Farms
Year Dollars/ Percentage of Total
Location/Crop Input Acre Difference
1985 Repairs 4.46 20.9
Kansas/wheat Machine hire 2.65 12.4
Fertilizers 1.59 7.5
Pesticides 0.99 4.6
1986 Machine hire 7.57 18.0
Kansas/wheat Fertilizers 7.53 17.9
Repairs 6.02 14.3
Pesticides 5.28 12.6
1986 Pesticides 5.09 24.1
M~nnesota/soybeans Repairs 3.01 14.2
Fertilizers 0.24 1.1
1987 Repairs 19.37 36.3
Minnesota/corn Fertilizers 8.00 15.0
Pesticides 4.61 ~ ~
SOURCES: Kansas Cooperative Extension Service. 1987. The Annual Report—Management
Information—Kansas Farm Management Associations. Manhattan, Kans.: Kansas State University;
Olson, K. D., E. J. Weness, D. E. Talley, ~ A. Fates, and R. R. Loppnow. 1987. 1986 Annual
Report, Revised. Southwestern Minnesota Farm Business Management Association. Economic
Report ER8724. St. Paul, Minn.: University of Minnesota; Olson, K. D., E. J. Weness, D. E. Talley,
F! A. Fates, and R. R. Loppnow. 1988. 1987 Annual Report: Southwestern Minnesota Farm
Business Management Association. Economic Report ER88-4. St. Paul, Minn.: University of
Minnesota.
studies). Regional cost of nrodllotinn Ctil~i~ hack an Err rm~nr~l~c~i-~
~ -or or- we'd ~~ ~~llt,5~
systems (Goldstein and Young, 1987; Kansas State University, 1987; Olson
et al., 1981, 1986, 1987) and the committee's limited case studies indicate
that the most profitable alternative and conventional farms are often those
that successfully cut back on fertilizer, pesticide, and machinery expenses
while sustaining high levels of crop production.
The extent and causes of variability in production costs warrant careful
study in assessing agricultural commodity, conservation, and regulatory
policies. High target prices, deficiency payments, and disaster provisions
that compensate farmers for crop losses are principal causes of inefficient
input use. Current farm programs base payments on historical per acre
yield levels, multiplied by a per bushed deficiency payment rate. The per
bushel deficiency payment is the difference between the government-set
target price and loan rate or the market price, whichever difference is less.
When deficiency payments are large, during periods of protracted low crop
prices, farmers have greater incentive to apply fertilizers and pesticides in
greater amounts to produce the most bushels per acre and collect the
OCR for page 234
234
ALTERNATIVE AGRICULTURE
TABLE 4-11 Estimated Fertilizer and Pesticide Use for Conventional
Management and PALSa
Fertilizer
(pounds/acre)
Crop
Pesticides
N P S
Rate Insecticide Rate
Herbicide (units/acre) or Fungicide (units/acre)
Conventionalb
Winter wheat
130 30 25
Spring barley 80 0 0
Winter wheat 130 30 25
Difenzoquat
methyl sulfate
Bromoxynil
Triallate
Bromoxynil
Difenzoquat
methyl sulfate
3.0 pints Benomyl 1.5 pounds
1.5 pints
1.25 quarts
1.5 pints
3.0 pints
Benomyl 1.5 pounds
Bromoxynil 1.5 pints
Spring peas O O O Triallate 1.25 quarts Phosmet 1.5 pounds
D~noseb-am~ne 0.8 pounds
PALS
Peas + medic O O O Triallate 1.25 quarts Phosmet 1.5 pounds
D~noseb-am~ne 0.8 pounds
Medic 0 0 0 0 0 0 0
Winter wheat O O O O O O O
Perpetuating alternative legume system. A low-input system with a three-year pea plus
medic-medic-wheat rotation with pesticides used only on peas.
Four-year wheat-barley-wheat-pea rotation with fertilizer and pesticide inputs each year.
SOURCE: Goldstein, W. A., and D. L. Young. 1987. An agronomic and economic comparison of a
conventional and a low-input cropping system in the Palouse. American Journal of Alternative
Agriculture 2(Spring):51-56.
A more common crop sequence in the Palouse is a 4-year rotation of
wheat-barley-wheat-peas (W-B-W-P). In this rotation, it is necessary to use
two herbicides as well as a systemic fungicide application for each crop. The
pesticides applied to the peas include the same insecticide used in the pea
crop year of the PALS rotation. Fertilizer applied to the conventional 4-year
rotation includes 130 pounds of nitrogen, 30 pounds of phosphorus, and
25 pounds of potassium per acre. The barley receives 80 pounds of nitrogen
per acre. No fertilizer is applied in the PALS rotation.
Input costs per year are dramatically higher in the conventional system,
at $129.40 per acre compared with $56.82 per acre for the PALS system. The
majority of this difference is comprised of fertilizer and pesticide costs that
are $57.52 per acre greater for the conventional system (Table 4-12~.
In contrast to input costs, annual crop yields were similar during 2 trial
years at three sites. PALS wheat yields averaged 62.6 bushels per acre
compared with 60.3 bushels on the conventional plots. The largest differ-
ences occurred during the drought of 1985; yields for the PALS experimen-
tal plots averaged 83 percent more than those of the conventional plots. In
1984, when rainfall was close to normal, the PALS wheat yields were 3
percent less than the conventional yields.
OCR for page 235
ECONOMIC EVALUATION
TABLE 4-12 Costs of Conventional and Alternative Rotations per Acre of
Rotation per Year
235
Costs/Acre (dollars)
Conventional PALSb
Inputs (W-B-W-P)a (P/M-M-W)
Fertilizers and pesticides 72.52 15.00
(application and product)
Field operation 45.44 35.00
(tillage, planting, and harvest)
Overhead and crop insurance 11.44 6.82
Total 129.40 56.82
Average yield of winter wheat 60.3 62.6
(bushels/acre)
aFour-year wheat-barley-wheat-pea rotation with fertilizer and pesticide inputs each year.
Perpetuating alternative legume system. A low-input system with a three-vear nea olus
medic-medic-wheat rotation with pesticides used only on peas.
- a--- r--r-~~
SOURCE: Goldstein, W. A., and D. L. Young. 1987. An agronomic and economic comparison of a
conventional and a low-input cropping system in the Palouse. American Journal of Alternative
Agriculture 2(Spring):51-56.
In three out of four scenarios, including market price and government
program price assumptions, the PALS rotation was equal or more profitable
on a per acre basis than the conventional rotation. The conventional system
is significantly more profitable than the PALS rotation only under high-
yielding (good weather) conditions with government price supports (Table
4-13~. Profits are greater in this instance primarily because a greater per-
centage of the acreage (75 percent of the total) produces government-sup-
ported crops. Under low-yielding conditions, the productivity of the con-
ventional rotation is reduced to such an extent that, even assuming
government support prices, the net income of the two systems is roughly
equivalent. Assuming market prices and no government program payments
or requirements, the PALS rotation is always more profitable.
IMPACT OF GOVERNMENT POLICY
Crops eligible for price and income supports are planted on more than 70
percent of the cropland in the United States. These include feed grains,
wheat, cotton, rice, soybeans, and sugar. From 80 to 95 percent of the acres
producing these crops are currently enrolled in federal programs. Dairy
farmers also enjoy income protection through a price support program,
import quotas, and marketing orders for milk. The marketplace has more
of an influence on prices of other commodities such as fruits, vegetables,
livestock, poultry, and hay and forage crops. However, many factors influ-
ence the supply and demand for these commodities as well as practices
used to produce a crop. Grading and cosmetic standards, for example, are
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236
ALTERNATIVE AGRICULTURE
TABLE 4-13 Gross Returns, Variable Costs, and Net Returns (dollars/acre of
rotation/year) Under Conventional and PALS Management, High and Low
Yielding Conditions, and Market and Target Prices, 1986
Conventionala
PALSb
High Yield Low Yield High Yield Low Yield
1986 Market prices
Gross returns 176.00 136.00 118.00 93.00
Variable costs 129.40 129.40 56.82 56.82
Net returns 46.60 6.60 61.18 36.18
1986 Government target prices
Gross returns 274.20 210.60 170.80 132.60
Variable costs 129.40 129.40 56.82 56.82
Net returns 144.80 81.20 113.98 75.78
aFour-year wheat-barley-wheat-pea rotation with fertilizer and pesticide inputs each year.
Perpetuating alternative legume system. A low-input system with a three-year pea plus
medic-medic-wheat rotation with pesticides used only on peas.
SOURCE: Goldstein, W. A., and D. L. Young. 1987. An agronomic and economic comparison of a
conventional and a low-input cropping system in the Palouse. American Journal of Alternative
Agriculture 2(Spring):51-56.
applicable to various fruit, vegetable, and meat products. These standards
are basically designed to control supply and price of individual crops.
Acreage reduction programs influence the amount of land available to pro-
duce hay crone; water pricing policies affect costs of production on irrigated
~ · ~ ~ ~ ~ ~~ . . ~ ~1 ~ ~ ~ ~ · ~
crops. trade policies here and abroad attect tne row or farm commodes
into and out of the U.S. market.
Government price and income support programs can have significant
unintended effects. During the early to mid-19SOs, the programs tended to
price U.S. exports out of highly competitive world markets because federal
support prices (the loan rates) were held rigidly high during a period of
declining world market prices. The programs have also encouraged surplus
production of certain commodities by reducing risks. They have provided
economic incentives for farmers to continue to grow certain crops, even in
periods of surpluses. Over the years, the programs also have contributed to
soil erosion and surface water and groundwater pollution by encouraging
the cultivation of marginal lands and subsidizing excessive and inefficient
use of inputs. Further, producers pay no price for offsite environmental
consequences of production. In many parts of the United States, producers
now routinely strive for higher yields than those profitable in the absence
of government programs designed to reduce risk. In other areas farmers
grow crops with a high risk of failure from weather or pest conditions
because government programs absorb all of the risk.
The price support payment that a farmer receives per acre is based on the
farm's historical yields, an average of the yield on supported crop acreage
OCR for page 237
ECONOMIC EVALUATION
237
in the previous 2 to 5 years (frozen at 90 percent of 1985 program payment
yield in the Food Security Act of 1985), and the target price established by
Congress and the USDA through legislation. Deficiency payments per
bushel of established yield are the difference between the target price and
market price or support price (loan rate), whichever difference is less. For
many crops, the target price has been far above the market price for most of
this decade (see Figures 1-30 and 1-33 in Chapter 1~.
High target prices can promote higher levels of inputs, thereby contrib-
uting to surplus production. This is illustrated by the theoretical example
presented in Figure 1-30 in which a farmer will produce 19,000 bushels at
the market price and 24,000 bushels at the target price (this example does
not take into account annual set-aside requirements). It costs the farmer
more to produce the additional 5,000 bushels than they are worth on the
market. The additional 5,000 bushels cost taxpayers $10,000 in government
payments ($2.00 per bushel x 5,000 bushels).
Commodity programs also influence which crops are planted and the
economic and environmental impacts associated with land-use decisions.
The cross-compliance provision of the Food Security Act of 1985 is designed
to control production of program commodities by limiting a farmer's ability
to increase base acres. It also serves as an effective financial barrier to
diversification into other program crops, especially if a farmer has no estab-
lished base acres for those crops. Cross-compliance stipulates that in order
to enroll land from one crop acreage base in the program, the farmer must
not exceed his or her acreage base for any other program crop. The practical
impact of this provision is profound, particularly if a farmer's acreage base
for other crops is zero. For example, a farmer with corn base acreage and no
other crop base acres would lose the right to participate in all programs if
any land on his or her farm was planted with other program crops such as
wheat or rye (oats are currently exempt) as part of a rotation. If a farm had
base acreage for two or more crops when cross-compliance went into effect
in 1986, the farm must stay enrolled in both programs each year to retain
full eligibility for benefits from both programs.
High government support prices also influence planting decisions.
Throughout the 1970s, soybean prices averaged more than twice the corn
target prices. In recent years, soybean prices have strengthened markedly
in contrast to corn. Yet, soybean stocks have fallen to their lowest level in a
decade, even though prospects for increased demand in the United States
and abroad are very good. The total acres planted with soybeans are declin-
ing because of high government support payments for other crops, most
notably corn. Moreover, considerable acreage is now producing corn be-
cause farmers must continue to plant their corn base every year to preserve
their current level of eligibility for future corn program payments. Even
though commodity prices may rise somewhat as a result of the 1988
drought, the programs will remain an attractive option to most growers.
This is because target prices and deficiency payments are likely to remain
substantial. Farmers have become more efficient, and interest and rents
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238
ALTERNATIVE AGRICULTURE
TABLE 4-14 Average Annual Target Prices as a Percentage of Total
Economic Costs
Crop 1978 - 1981a 1982 - 1985b 1986 - 1990C
Corn 95 110 141
Cotton 82 107 111
Rice 106 125 153
Soybeans 82 85 91
Wheat 94 108 123
NOTE: Total economic costs cover all fixed and variable production costs for an operator with full
ownership of the land and other capital assets.
aCrop years covered by the Food Security Act of 1977.
bCrop years covered by the Food Security Act of 1981.
Forecasts under current legislation for crop years covered by the Food Security Act of 1985.
Minimum target prices for grains and cotton and the minimum soybean loan rate under the
Agricultural Act of 1949, as amended, were assumed for 1988-1990.
Soybean loan rate as a percentage of soybean total economic costs.
SOURCE: U.S. Department of Agriculture. 1988. Investigations of Changes in Farm Programs.
201-064/80069. Washington, D.C.
have declined, making deficiency payments even more valuable (Table
4-14).
The Effect of Rotations on Base Acres
and Fecleral Deficiency Payments
For farms currently participating in commodity programs, the transition
from continuous cropping to rotations will decrease gross farm income by
reducing a farm's acreage base eligible for federal deficiency payments. The
magnitude of this reduction depends on the size of the deficiency payment.
Table 4-15 illustrates the reduction in deficiency payments due to the loss
of corn base acres resulting from the adoption of a corn-oats-meadow-
meadow (C-O-M-M) rotation. When complete, the change from continuous
corn to a C-O-M-M rotation on 1,000 base acres would cost this farm about
$90,000 per year in deficiency payments. Overall farm income, however,
depends on a number of factors, including the market for new crops, incor-
poration of livestock into the operation, the possible increase in corn yield,
and the type of rotation adopted. Nonetheless, the loss of current and
future income from ineligibility for government programs presents a signif-
icant obstacle to the adoption of alternatives.
The previously discussed PALS studies of wheat farms in Washington
and additional work on cash grain farms in Iowa further illustrate the strong
economic influence of the target price and base acres provisions of the farm
programs. Almost no pesticides or fertilizers were used in the PALS rota-
tion. This reduced variable production costs per acre to about half that of
the conventional rotation, or $56.82 versus $129.40 per acre (Goldstein and
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ECONOMIC EVALUATION
TABLE 4-15 Reduction of Deficiency Payments and Corn Acreage Base
Following Change From Continuous Corn to C-O-M-Ma Rotation on
1,000-Acre Farm
239
Years Since Corn Corn Set- Corn Deficiency
Adopting C-O-M-M Base Planted Asideb Yield Payments
Rotation (acres) (acres) (acres) (bushels/acre)C (dollars)
0 1,000 800 200 147 142,296
4 550 250 110 173 52,332
8 250 250 50 173 52,332
aRepresents a corn-oats-meadow-meadow rotation.
bAssumes 20 percent corn base set-aside.
Based on Duffy, M. 1987. Impacts of the 1985 Food Security Act. Ames, Iowa: Department of
Economics, Iowa State University.
Corn production times 1987 deficiency payment ($1.21/bushel), ignoring the statutory
$50,000 limit on payments.
Young, 1987) (see Table 4-12). Wheat yields were nearly identical. PALS
reduced pea yields about 10 percent from the conventional rotation yields,
however, because of competition with the medic.
The high support price for wheat greatly affects the comparative profita-
bility of PALS and conventional rotations. When the revenue from sale of
all crops in the rotation was based on government deficiency payments,
favorable growing conditions, and subsequent high yields, the conventional
rotation earned $144.80 per acre, compared with $113.98 per acre for the
PALS rotation. These figures assumed 1986 target prices for wheat and
barley that were 45 and 35 percent higher than market prices, respectively.
But when market prices were used in calculating net returns, the positions
were reversed. The PALS rotation returned an estimated $61.18 per acre
over variable costs versus $46.60 for the conventional rotation (see Table
4-13).
The cause of the disparity in net returns is that the PALS rotation pro-
duced wheat, a price-supported crop, on only one-third of the acreage each
year. PALS wheat yields averaged 62.6 bushels per acre, whereas conven-
tionally produced wheat yields averaged 60.3 bushels per acre. The conven-
tional rotation, however, produced program crops on 75 percent of the
acreage each year (2 years of wheat, 1 year of barley in a 4-year rotation).
But when less favorable growing conditions were assumed, the net returns
of the conventional rotation declined dramatically, even assuming govern-
ment price supports. Under government support and less favorable weather
conditions, PALS earned only $5.42 less per acre than the conventional
rotation.
An analysis of five rotations in Iowa reached similar conclusions. Without
government payments, continuous corn was found to be the least profitable
of the rotations at $56.00 per acre average net return over variable cost
compared with $90.00 for a corn-soybeans-corn-oats (C-B-C-O) rotation and
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240
ALTERNATIVE AGRICULTURE
TABLE 4-16 Returns per Acre by Nitrogen Fertilizer Application Rates,
Rotation and Government Program Participationa
Dollars/Acre
Basic
Participation
No Program (20 percent Full Participation
Rotation Participation set aside) (35 percents N (pounds/acre)
C-C-C-C 56 979 221 240
C-C-C-O 61 187 186 180
C-B-C-O 90 177 175 120
C-C-O-M 64 151 150 120
C-O-M-M 67 113 112 40
NOTE: Crops in rotations are abbreviated by the following: C is corn; O. oats; B. soybeans; and M,
meadow.
aReturns over variable costs only.
b35 percent includes 20 percent set aside and 15 percent paid land diversion.
SOURCE: Duffy, M. 1987. Impacts of the 1985 Food Security Act. Ames, Iowa: Department of
Economics, Iowa State University.
$67.00 for a corn-oats-meadow-meadow (C-O-M-M) rotation (Duffy, 1987).
But with government program payments and a 20 percent set-aside, contin-
uous corn earned annually on average $222.00 per acre, compared with
$177.00 and $113.00 for the C-B-C-O and C-O-M-M rotations, respectively.
In recent years the feed grain program encouraged higher per acre corn
yields, continuous corn production, and greater use of pesticides and nitro-
gen fertilizer. Duffy (1987) incorporated prevailing input assumptions into
his study: for continuous corn, 240 pounds of nitrogen per acre was ap-
plied; for the C-B-C-O and C-O-M-M rotations, the application rates were
120 and 40 pounds, respectively. By encouraging high-yield, continuous
corn production, the program has increased the corn surplus in spite of
acreage set-aside requirements designed to reduce production, while exac-
erbating the potential for surface water and groundwater pollution (Table
4-16) (Duffy, 1987).
Impact of Research and Technology Transfer
Alternative farming systems are based on better management and infor-
mation rather than the use of commercial products. Hence, there may be
fewer opportunities and incentives for current input producers to develop
and market inputs for alternative farming systems. Markets may be created,
however, for companies offering management advice on better crop rotation
strategies, efficient manure use, IPM, and other such practices and technol-
ogies. More resources should be allocated to collection of data about alter-
native farming systems regarding costs and the value and variability of
resource requirements, yields, and other performance measures ordinarily
OCR for page 241
ECONOMIC EVALUATION
241
incorporated into farm management budgets. A data base should be devel-
oped to integrate findings from the various biological and physical sciences,
financial analyses, and estimates of the impact of farm practices on human
health, water quality, and the environment.
SUMMARY
Research has begun to demonstrate the economic benefits of alternative
farming systems and how current policies impose incentives and disincen-
tives for the selection of various types of farming systems.
The committee's case studies provide examples of several profitable alter-
native operations. Additionally, several farm surveys provide general infor-
mation about the overall financial performance of farmers using low-input
methods, such as those who practice organic farming. But many questions
remain unanswered. Farm surveys do not provide conclusive evidence re-
garding the advantages and disadvantages of different farming methods
because many factors are randomized or not constant. Somewhat more
systematic data are available regarding the economic performance of IPM
programs. IPM has been highly successful in many instances. Farmers who
use IPM usually reduce the amount of pesticides applied and increase their
net returns compared with farmers who apply pesticides on a regular
schedule.
Diversification strategies such as crop rotations can decrease input costs
and increase crop yields. Experimental results must be interpreted with
caution, however, when used to project the results of widespread adoption.
Nonetheless, rotations have the potential to simultaneously increase farm
income and reduce farm program expenses. Forage legumes in the crop
rotation have the added advantage of supplying nitrogen. But when cash
grain prices are supported far above the market level, many farmers would
reduce their net farm incomes if they shifted from growing only price-
supported crops, such as corn and soybeans, to legume-based rotations
unless commodity program rules are reformed.
Livestock are an essential component of some diversified alternative crop-
ping systems. Many alternative farming systems, however, do not depend
on livestock. Examples include perennial crop systems such as orchards and
vineyards, and vegetable and other annual crop farms that use legumes as
green manure crops or import organic residues from off the farm. Diversi-
fication can reduce risks and variability of net returns to farm families. For
these reasons, it should be studied in more detail.
Ver,v little is known about the aggregate impacts of possible widespread
adoption of alternative farming methods. Future economic research on al-
ternative farming methods should examine social and aggregate costs and
benefits. This research should be integrated with that of other agricultural
disciplines, the Extension Service, and the private sector to apply the results
at the farm level.
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242
ALTERNATIVE AGRICULTURE
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Representative terms from entire chapter:
pest control
