Monthly Archives: May 2014

268 – Conservation agriculture in developing countries

Is “Conservation Agriculture” really a win-win for farmers and the environment? It reduces the losses of soil and nutrients from agricultural land, but are farmers who adopt it better off or worse off? In asking this, my focus is on developing countries, where soil erosion remains a serious problem.

Soil erosion reduces farmers’ livelihoods, but also causes off-farm damage, particularly to rivers, lakes and dams, and “Conservation Agriculture” has been promoted as a solution. A particular Conservation Agriculture (CA) package of three farming practices has been widely promoted in developing countries as a win-win option for farmers and the environment. It consists of zero tillage, retention of crop residues for soil cover (mulching), and rotation of cereal crops with legumes, which fix nitrogen and so increase soil fertility.

Something close to this package has been widely adopted in North America, South America and Australia, but its adoption by poor farmers in Africa and South Asia has generally been disappointing, despite years of active promotion by international organisations.

Does this mean that poor farmers can’t recognise a good thing when they see it, or is the problem that benefits of Conservation Agriculture to these farmers are not sufficient to outweigh the costs? Given the massive differences between small subsistence farms in southern Africa and large commercial farms in North America, we should be open to the possibility that a practice could be very attractive to one group of farmers but not the other.

Photo: Marc Corbeels

Photo: Marc Corbeels

In 2012 I was invited to review the evidence on the economics of Conservation Agriculture in Africa and South Asia, and to present my findings as part of a workshop on Conservation Agriculture held in Lincoln Nebraska that year.

Part of the motivation for the workshop was to try to address issues of controversy about Conservation Agriculture in developing countries. Some people had been critical of what they saw as promotion of CA as a silver bullet solution without sufficient consideration of circumstances where it did and didn’t work for farmers. Others hit back at these criticisms and defended CA as the best available option.

The workshop marshaled the evidence on various facets of CA. The results have recently been published in a special issue of the journal Agriculture, Ecosystems and Environment. All the papers can be accessed for free here.

Looking at past literature on the economics of CA for poor farmers, my co-authors and I found that there wasn’t all that much literature, but what there was tended to indicate that CA (or its components) should be economically attractive to small farmers. However, looking critically, little of this evidence was based on sophisticated analysis. Many of the economic models used seemed too simplistic to be reliable. 

So we set out to build a model of our own and apply it to a case study in northern Zimbabwe. Marc Corbeels from CIRAD joined the team, providing his data and extensive experience for the case study.

A key finding is that the farm-level economics of CA are highly case-specific. In some situations it is competitive with traditional agriculture, but in others it falls far behind. Organisations promoting CA need to be quite careful and discriminating about where it is actually a viable strategy if they are not to waste their own and farmers’ resources.

We didn’t find any scenarios where CA was substantially better than traditional agriculture. Where it was better, it was only slightly better, but where it was worse, it was sometimes dramatically worse. This would be important to farmers who are worried about risk.

CA tends to be more attractive for larger, wealthier farmers and to be much less profitable for the smallest, poorest farmers. No wonder many of them have been reluctant to adopt it.

There are several elements that can reduce the benefits of CA for small farmers. One is that zero tillage can increase the number of weeds in the crop. This either reduces crop yield or requires additional effort for weed control. A second factor is that some of the benefits take about a decade to kick in (increased yields from zero tillage combined with mulching). The poorest farmers might not be able to afford to look that far ahead when they make their farming decisions. Thirdly, crop residues may not be available for mulching. They may be harvested to feed to livestock, or in some cases farmers cannot keep other people’s cattle off their crop residues even if they want to. (The community doesn’t allow it, and there are no fences anyway.) Fourthly, legume crops may or may not be profitable enough to be worth including in the rotation. It depends on their yields and sale prices.

Some extension programs have emphasised the importance of farmers adopting all elements of the CA package. This is quite naive, as full adoption of farming packages rarely happens anywhere. Farmers almost always pick and choose the elements that they think will work for them, and leave the rest. We found that the economics tend to favour this approach in the case of CA – partial adoption tended to be more attractive than full adoption.

So, overall, this is one of those cases where the farm-level economics pose a barrier to changes that people would like to see, at least in some cases. There are good and bad ways to respond to this information. The bad ways include ignoring the information and continuing to promote CA in an untargeted way, or thinking that the adverse economics could be overcome by better or more intensive efforts to promote CA. The good ways include using the information to target CA promotion to situations where it is likely to be adoptable, and redoubling efforts to develop more appropriate soil conservation practices for situations where it is not. In some cases it might be feasible to subsidise CA to increase its uptake, but this won’t overcome adverse economics unless the subsidies can be maintained indefinitely. If they are to be maintained indefinitely, we would want to have confidence that the system will result in large enough reductions in the off-farm costs of soil erosion. 

Further reading

Pannell, D.J., Llewellyn, R.S. and Corbeels, M. (2014). The farm-level economics of conservation agriculture for resource-poor farmers, Agriculture, Ecosystems and Environment 187(1), 52-64. Journal web site (access to the paper is free) ◊ On-line video presentation ◊ IDEAS page for this paper

267 – Budget 2014 and the environment

Last week’s budget included funding cuts to many areas of government, and the environment certainly was one of the areas to suffer. There were some new initiatives, but they were outweighed by what was taken away. 

The most substantial environmental initiative in the budget is the Emissions Reduction Fund (ERF), a key part of the government’s election promise of a Direct Action climate policy. The headline commitment is A$2.55 billion, although spending in the next three years will be only A$300 million, A$355 million and A$417 million – 30% less than the amounts announced by Environment Minister Greg Hunt as recently as November last year.

The ERF is intended to replace the carbon tax, which is expected to raise more than A$7 billion in 2013-14. It is no secret that economists generally don’t support this policy change, viewing it as a move from a relatively efficient to a relatively inefficient mechanism that will worsen the deficit.

volunteersAnother of the key initiatives also amounts to give and take. There is A$525 million over four years for the Green Army (another election promise), which will undertake a range of environmental work. But this is almost fully offset by cuts of A$484 million over five years to the Caring for our Country programme and Landcare, now merged into a new National Landcare Programme.

Of the A$1 billion over four years that remains in the merged programme, some is tied to other election commitments, such as a nature corridor in Western Sydney (A$7.5 million), a Whale and Dolphin Protection Plan (A$2 million), and the 20 Million Trees programme (A$50 million).

These changes amount to a substantial cut in funding to Australia’s 50 regional natural resource management bodies – a fate they also suffered after the last change of government in 2007.

On the face of it, the budget looks to have delivered on an election promise to safeguard Australia’s most iconic environmental asset, the Great Barrier Reef, with a new Reef Trust set to provide A$40 million over four years.

But while this sounds respectable, it is a very small percentage of the amount needed to achieve existing targets for the reef. It is also partly offset by a A$2.8 million cut (over four years) to the Great Barrier Reef Marine Park Authority.

There are lots more cuts too. The 4900 staff employed in the environment portfolio will be reduced by 300, although that is fewer than might have been feared.

Then there are numerous cuts to existing programs. The most affected areas, predictably, are those related to climate change, including carbon storage, renewable energy and alternative fuels. The Australian Renewable Energy Agency is to be wound up, saving A$1.3 billion over five years starting in 2017-18. Funding of A$1 billion remains to support existing projects. 

Another large saving is a A$459 million cut to the Carbon Capture and Storage Flagship Programme, also commencing in 2017-18.

Climate Spectator has confirmed that an earlier promise of A$500 million for a One Million Solar Roofs program has been quietly dropped. Similarly, there is no sign of the promised A$50 million for Solar Schools, and the promised Solar Towns program has been dramatically scaled down, from A$50 million to A$2.1 million.

Biodiesel and ethanol will both be subject to increasing excise rates, growing to 50% of the “energy content equivalent tax rate” (the scale by which fuels are taxed according to how much energy they contain) by 2021. This will reduce the incentive for people to prioritise these fuels over fossil fuels.

Meanwhile, there are various cuts to fuel efficiency and green technology measures, including:

  • The National Low Emissions Coal Initiative (A$17 million)
  • The Clean Technology Programme (A$45 million)
  • The National Greenhouse and Energy Reporting Scheme (A$2 million)
  • The Ethanol Production Grants program (A$120 million over six years)
  • Grants to support algal synthesis and biofuels (A$5 million)
  • The Cleaner Fuels Grants Scheme
  • Water and science

Water is also a target for cuts, with the abolition of the National Water Commission (A$21 million over four years) and savings of A$408 million in the Sustainable Rural Water Use and Infrastructure progam, leaving that program with A$4.5 billion over 10 years.

These savings include reduced funding for water buyback, with the government prioritising water recovery through infrastructure projects. In this, the government has chosen to prioritise a highly inefficient method to generate water, in response to political pressure from the agriculture sector. As with the changes to climate policy, this policy conflicts with the government’s aim to be seen as a sound economic manager.

Environmental research funding will probably be affected by cuts to CSIRO (A$111 million), the Cooperative Research Centre program (A$80 million) and the Australian Research Council (A$75 million). It will definitely be affected by cuts to the National Environmental Research Program (A$21 million), the Office of Water Science (A$10 million) and the Australian Institute of Marine Science (A$8 million).

Finally, the decision to resume indexation of the fuel excise will have an incidental effect on the environment. One cannot help being struck by the irony of this measure being introduced by a government that was so highly critical of the carbon tax and the burden it places on the community.

The initial cost of this change will be relatively minor (A$280 million in 2014-15), but it will grow rapidly year by year (to A$1.85 billion by 2017-18). Before long, its annual cost may exceed that of Australia’s carbon pricing arrangements, depending on how prices change in Europe’s carbon market, which the previous government had signed up to.

Not that I’m being critical of the decision to index the fuel excise. As well as generating revenue, it will reintroduce at least some of the incentive to reduce fossil fuel consumption that will be lost if the Senate approves the government’s plan to dismantle the carbon pricing system.

That point aside, it is not a good budget for the environment – but then that was expected. In relative terms, the environment probably hasn’t been hit any harder than other areas like health and education.

A version of this article was first published in The Conversation on 14 May 2014.

I did an interview on ABC Radio National (Bush Telegraph program) on 16 May 2014 about Landcare and the Budget. You can listen to it here. (My bit starts about half way through the item.)


266 – Supply and demand: The wool crisis

The wool crisis of 1990-91 was a spectacular case of economic mismanagement, where an industry inflicted massive costs on itself (and others) through acts of obvious and determined stupidity. Industry leaders convinced Australian wool producers to endorse a strategy that was completely devoid of economic sense. The aim was to make producers rich, but the result was that they lost billions of dollars.

What they did was establish a reserve price, below which they would not allow wool to be sold. That needn’t have been disastrous, except that they set the reserve price optimistically during a period of booming demand, and then refused to lower the price when demand cooled. Farmers kept receiving the artificially high price and so sheepproduced huge volumes of wool – much more than they would have done at the real market price. At the same time, wool buyers responded to the high price by reducing their purchases of wool and switching to other textiles. The predictable result was a huge stockpile of unsold wool.

The industry borrowed billions of dollars to pay itself inflated prices for its own wool, put it in sheds and pay storage and interest costs, hoping that the price would rise again, but actually creating ever-increasing pressure for it to fall. It really was as ridiculous as that sounds. It’s hard to imagine how anybody involved could not see the folly in this, but somehow wool-industry leaders convinced themselves and most wool growers that it was a good strategy.

Figures 1, 2 and 3 illustrate what was happening, in a simple supply and demand model. Figure 1 shows what the price and quantity would have been in a free market: a price of 555 c/kg, resulting in a balance between supply and demand, at 44 units. (These are not the real numbers – they are just for illustration).

Figure 1

Figure 1

Figure 2 shows what happened when the Australian Wool Corporation (AWC) set a high reserve price (of 870 c/kg), and passed that price on to farmers. Because of the artificially high price, demand for wool was reduced (to 13 units in this illustration) while production of wool was increased (to 84 units). The wool that wasn’t bought (71 units – the difference between production and sales) was acquired by the AWC and stored indefinitely.

Figure 2

Figure 2

Just as in Figure 2, the AWC found itself having to acquire most of the wool being offered to the market. By the end of the scheme, the amount of wool being stored reached extraordinary levels (4.8 million bales, approaching a billion kilograms), and it was incurring around $3 million per day (over $1 billion per year) in costs of storage and interest.

The sensible way to get rid of over-production would have been to abandon the reserve-price scheme, but instead the AWC decided to tax the price received by wool producers. Presumably, the aim was to bring the amount of production down to about the volume of wool being purchased. Figure 3 illustrates this outcome. In this figure, wool buyers are still being charged 870c, so they are still only purchasing 13 units. Wool producers are being taxed 566c, so the price they receive is only 304c, resulting in production of 13 units (matching demand).

Figure 3

Figure 3

If the original reserve price system was stupid, this system of taxing producers was stupid squared. For it to eliminate surplus production, wool producers would have had to receive a lower price, and produce less wool, than in a free market. And this was a system that was intended to benefit wool producers!

Throughout the drawn-out crisis, proponents of the scheme argued that the shortfall in demand could be overcome through market promotion, and a big chunk of the wool tax was spent on this. A tenacious faith in this idea was partly what drove them to stick with the scheme long after it was clearly a disaster. If the experience proved anything, it’s that this faith was unjustified.

Another factor driving them to stick doggedly with the scheme was an apparent unwillingness of the decision makers to admit that they had made mistakes. The delays in shutting it down greatly escalated the costs.

Eventually (much later than it should have) the Australian Government exercised its power to force the AWC to lower the price and later shut down the scheme. The AWC fought it all the way.

Wool producers, processors, traders and Australian taxpayers all lost money in this scheme. Charles Massy in his excellent book “Breaking the Sheep’s Back” estimates that the total cost was at least $12 billion in 2011 terms (and probably much more), making it “the biggest corporate disaster in Australian history in terms of losses generated by a single corporate or statutory business entity” (Massy, 2011, p.382).

At the time of the crisis, I was living out in the wheat-sheep belt of Western Australia, so I got to hear much of the debate at the grass-roots level. Some farmers could see that the industry was making a massive mistake, but most were following the lead set by industry leaders and blaming the scheme’s problems on everybody else: politicians, economists, wool customers.

It would be hard to imagine a more incompetent and irresponsible set of decisions than those of the AWC board and management throughout this episode. As a result they caused untold human misery. We can count the billions of dollars lost, but we don’t have statistics for the depression, the suicides, the fractured families or the agony caused to farmers by having to shoot and bury thousands of worthless sheep. I don’t think those responsible for this misery have ever been adequately held to account.

The wool industry has never recovered. It remains a shadow of its former self.

A really basic understanding of economics would have avoided all of this. Not only did the industry leaders lack this understanding, but, as Massy reveals, they actively resisted and rejected advice from competent economists when they received it, including economists who worked for them.

An online review of Massy’s book sums up one of the key lessons very well: “Those who defy the markets will eventually lose. They may lose slowly, or lose in a spectacular collapse, but they will lose.”

Further reading

Bardley, P. (1994). The collapse of the Australian Wool Reserve Price Scheme, The Economic Journal 104(426), 1087-1105. IDEAS page

Massy, C. (2011). Breaking the Sheep’s Back, University of Queensland Press. Here

Richardson, B. (2002). The politics and economics of wool marketing, 1950–2000, Australian Journal of Agricultural and Resource Economics 45(1), 95-115. Journal page here