Category Archives: Agriculture

316 – Resources for agri-environmental schemes

I’ve been asked to present a talk in Ireland in two weeks, on the topic “The Design of Effective Agri-Environment Schemes”. In putting the talk together, it struck me that I (with help from colleagues) have developed quite a few resources in this space, so I’ve collected them on a new web site to make them easily accessible.

Agri-environmental schemes (or programs or policies) aim to reduce the adverse impacts of agriculture on the environment. There are many such schemes around the world, but often they are not very efficient or effective. We could often do a lot better if we did a smarter job of designing and implementing these schemes.

Not that it’s easy. There are so many aspects to consider: the effectiveness of different practices at reducing environmental damage, their attractiveness (or otherwise) to farmers, the mechanisms to be used to promote the best practices, the costs and risks of different approaches, which environmental issues are the priorities, and so on. In my view, most designers of agri-environmental schemes don’t appreciate what a difficult task they are trying to do, and make do with relatively quick and dirty approaches to the design.

The resources I’ve included on the web site address a wide range of relevant issues, including:

  • Lessons from past agri-environmental schemes
  • The selection of appropriate policy mechanisms
  • Measuring environmental values
  • Ranking projects, including the choice of an appropriate metric
  • Additionality
  • Understanding and predicting farmers’ adoption of new practices
  • Dealing with uncertainty and including systems for learning from experience
  • The need to pull off that together in a coherent framework

It includes journal articles, books, reports, frameworks, computer tools, web sites, and blog posts, plus links to my free online course on “Agriculture, Economics and Nature”.

Overall, if an organisation wanted to design and deliver an agri-environmental scheme that would really deliver outcomes, they could benefit greatly from the material on this site. The URL is www.resources4aes.net.

Further reading

Pannell, D.J. (2008). Public benefits, private benefits, and policy intervention for land-use change for environmental benefits, Land Economics 84(2): 225-240. Full paper (140K) * IDEAS page

312 – The economics of nitrogen in agriculture

The global challenge of feeding seven billion people would be more difficult without nitrogen fertilizer, but it causes pollution of rivers, lakes and coastal waters around the world, and it contributes to emissions of greenhouse gases. It increases the profitability of individual farmers, but it is over-applied in many cases, wasting money and needlessly worsening environmental problems.

These are, in large part, economic issues. In a recent paper I attempted to summarise the large and diverse research literatures on the economics of nitrogen in agriculture. Here are some of the key points.

At the farm level

The production function for nitrogen (N) fertilizer (the relationship between yield and the rate of nitrogen fertilizer) always exhibits diminishing marginal returns – it flattens out at higher fertilizer rates. In dry conditions, yield may even fall at high N rates.

The rate of nitrogen fertilizer that maximises expected profit is less than the rate that maximises expected yield, sometimes much less.

Here’s a really neat tool that shows the relationships between N, yield and profit for corn in the US. http://cnrc.agron.iastate.edu/

Visual effect of nitrogen fertilizer on corn

Risk

N fertilizer affects the riskiness of cropping. For two reasons, higher N rates are more risky (i.e. profits are more variable at higher N rates). One reason is that the grain price is itself risky. Since profit depends on grain price times yield, and yield usually increases with increasing N rate, the more N you apply, the more variable your profit will be. In addition, yield also tends to be slightly more variable at higher N rates.

Flat payoff functions

There always exists a range of fertilizer rates that are only slightly less profitable than the profit-maximising rate (i.e. a range where the payoff function is relatively flat), and in most cases, that flat range is wide. This means that the farmer has flexibility in choosing the fertilizer rate. If a lower rate would better satisfy another objective (e.g. risk reduction), the farmer can choose that rate with little sacrifice of profit. If regulators require a moderate reduction in fertilizer rate below the farmer’s economic optimum, the cost to the farmer will be small. Flat payoff functions also mean that the benefits of precision-agriculture technologies that spatially adjust fertilizer rates within a field will usually be small.

Nitrogen pollution

Typically, the marginal cost to farmers of nitrogen emissions abatement is low for low levels of abatement but increases at an increasing rate as the required level of abatement increases. As a result, modest targets for abatement can often be achieved at low cost, but ambitious targets can be extremely costly.

Spatial targeting of abatement effort (both at the regional and international scales) can generate much larger benefits than untargeted policies, although these additional benefits are likely to be offset to some degree by increased costs required to run a targeted program (costs of information and administration).

Policies intended to increase farmers’ incomes can have the unintended consequence of increasing nitrogen pollution by increasing the incentive to apply fertilizer.

Further reading

Pannell, D.J. (2017). Economic perspectives on nitrogen in farming systems: managing trade-offs between production, risk and the environment, Soil Research 55, 473-478. Journal web page

Gandorfer, M., Pannell, D.J. and Meyer-Aurich, A. (2011). Analyzing the Effects of Risk and Uncertainty on Optimal Tillage and Nitrogen Fertilizer Intensity for field crops in Germany, Agricultural Systems 104(8), 615-622. Journal web page ♦ IDEAS page

Schilizzi, S. and Pannell, D.J. (2001). The economics of nitrogen fixation, Agronomie 21(6/7), 527-538.

Pannell, D.J. and Falconer, D.A. (1988). The relative contributions to profit of fixed and applied nitrogen in a crop‑livestock farm system, Agricultural Systems 26(1), 1‑17. Journal web page ♦ IDEAS page

Pannell, D.J. (2006). Flat-earth economics: The far-reaching consequences of flat payoff functions in economic decision making, Review of Agricultural Economics 28(4), 553-566. Journal web page ♦ IDEAS page

310 – Additionality can be tricky to assess

Many environmental policies and programs pay public money to people or businesses (or give them tax breaks or discounts) to encourage them to adopt more environmentally friendly practices and behaviours. A seemingly common-sense rule for these sorts of programs is that we shouldn’t pay people to do things that they were going to do anyway, without payment. But it can be quite a hard rule to apply in practice.

The idea that we shouldn’t pay people to do things that they were going to do anyway goes under the name of “additionality”. (It is also related to the with-versus-without principle in Benefit: Cost Analysis, and the concept of market failure – see PD272).

The idea behind “additionality” is that, when a program pays money to people to change their behaviours, the environmental benefits that result should be additional to the environmental benefits that would have occurred anyway, in the absence of the payments.

The reason this matters is that, if we are able to target payments to those behaviours that do result in additional environmental benefits, we’ll end up with greater environmental benefits overall, compared to paying for non-additional benefits – we’ll get better value for taxpayers’ money.

Some environmental programs do a poor job of checking for additionality. As I noted in PD272, much of the money given to farmers in US agri-environmental programs is not additional. In Australia, the Direct Action program for climate change doesn’t consider additionality well when selecting the winning bids in their reverse auctions (it compares practices before vs after signing up to the program, not with versus without).

So, environmental programs that allocate money to people or businesses should worry about additionality, but how? It can be harder than it sounds. It’s all very well to say, “only pay people if they would not have done it anyway”, but how do we know what they would have done anyway?

Sometimes it’s reasonably easy. There are cases where we can be pretty confident that people would not have done the environmental action, and will not start doing it in future, without a payment or regulation. I suspect that most of the work on Australian farms to fence off waterways to exclude livestock would not have happened without payments to cover the cost of fencing materials.

In the US, the Conservation Reserve Program pays farmers to remove agricultural land from production and plant environmentally beneficial species. This is probably mostly buying actions that lead to additional outcomes.

The nature of these additional activities is that they are things that are not normally done by farmers. This is largely because they cost the farmer money.

Judging additionality can be much trickier for environmental actions that also generate enough private benefits to be potentially worth doing by the private individuals or businesses. Zero tillage is a good example. Widespread adoption by farmers of zero tillage in Australia, Canada, the US and some other countries has substantially reduced soil erosion, with a range of off-farm benefits. But the reason this practice has been adopted so widely is that it can be very beneficial to the farmers who adopt it. Paying Australian farmers as a reward for doing zero tillage would be pointless, because most of them are already doing it. The public benefits would not be additional.

But imagine how it was in the early days of zero tillage. From the time when it was first developed, it took several decades for zero tillage to be taken up by most farmers. For the first decade, there were very few adopters. A program looking at subsidising zero tillage in 1990 would probably have judged that the payments would lead to additional benefits, and I would not have blamed them.

In fact, at that time, before the systems and technologies to make zero tillage work as well as it does now had been fully developed, payments in many cases would have satisfied the additionality condition. But only temporarily. At some point, the payments would have needed to be switched off, but judging when to switch them off would have been incredibly difficult. Most likely the payments would have continued for quite a while after additionality was lost.

For some practices, additionality comes and goes. For example, planting perennial pastures sequesters more carbon in soils than is found under annual crops, so it might be worth paying crop farmers to convert. But only if they would not otherwise have done so. The area of perennial pastures in Australia rises and falls over time in response to the prices of livestock products, the performance of available perennial pasture varieties, and the economic performance of cropping. If an agency started to pay farmers to plant perennial pastures, ideally they would keep a close eye on the economics of perennial pastures relative to cropping, in case additionality was lost. If it was lost for a period, then payments for that period are achieving nothing, and could be cut without losing the sequestered carbon.

But how would the agency know? The economics of a mixed farming system are very complex, and highly context specific. I worked on nothing but the economics of mixed farming systems for about 15 years, and it would take me quite a bit of effort to assess the additionality of perennial pastures on a particular farm. It would likely vary from paddock to paddock within the farm. The agency could potentially pay consultants to regularly assess the economics, but the costs of doing so on an individual farm would probably outweigh the value of the additional stored carbon.

What the Australian Government’s Emissions Reduction Fund does instead is a before-vs-after comparison of soil carbon, and it assumes that all of the increase is additional for the life of the agreement. This works initially, but the longer the agreement goes on, the larger the chance that additionality will be lost. If it is lost, then the public money allocated for converting to perennial pastures will just be a gift to farmers who would have done it anyway. The gifts could be small and short term or large and long-term; it’s impossible to know in advance. If it turns out to be large and long term, it is the farmer’s good luck – there is no mechanism in the program to turn the payments off.

Should the program have been designed differently? As I said earlier, rigorously assessing additionality on each farm over time is probably not feasible for this practice. It would cost so much that the investment in soil carbon sequestration was not worthwhile.

Additionality could be assessed for a region, rather than for many individual farms. That would make it more affordable, but given the high heterogeneity of the economics of perennial pastures within a region, or even within a farm, the assessment would be wrong in many cases. Still it might be judged to be acceptable as a compromise.

The other alternative is not to provide payments for soil carbon sequestration at all. Personally, that would be my recommendation. There are other problems with paying for soil carbon as well – leakage and permanence, not just additionality (Thamo and Pannell 2017) – and I don’t believe it’s possible to develop a sound policy that is worth the transaction costs.

Although assessing additionality can be difficult, I’m not saying that it is irrelevant. It is always worth thinking it through carefully when setting up an environmental program, and sometimes it is feasible to do a reasonably reliable assessment of it at reasonable cost. But not always. If not, then the program managers have to judge whether the risk of non-additionality is so high that it is not worth proceeding with the program. That’s a difficult judgement that should not be made lightly.

Further reading

Thamo, T. and Pannell, D.J. (2016). Challenges in developing effective policy for soil carbon sequestration: perspectives on additionality, leakage, and permanence, Climate Policy 16, 973–992. Journal web page

307 – John Kerin’s memoirs

John Kerin was Minister for Primary Industries in the Australian Government between 1983 and 1991. His memoirs are now available as a free download. Having seen him speak several times since he ceased being a minister, I think his memoirs should be fascinating and very informative. Agriculture was very lucky to have him as minister during this period of great change and disruption. 

John Kerin was unusual as a minister in that he knew a lot about the issues he was responsible for. Not only was he experienced as an agricultural producer, but he was also trained as an agricultural economist, and worked for a while in the Bureau of Agricultural Economics.

Apparently, his expertise was not always appreciated by his department. In the last part of the book he says “the ethos of some government departments was that they preferred ministers who knew nothing – the better to manage or control them. However, I thought that it was not necessarily an impediment to know something about your portfolio areas. The constant rotation of ministers is not good for policy making.”

Not only did he know a lot, he was clearly very thoughtful and remarkably frank. “Nor … do I want to give the impression that I was always sure about what I was doing, what the outcome of some policy options may be or where the changes and reforms we were introducing may lead. … By nature I am a pessimist, slow to come to decisions and generally believe that I am wrong until convinced of the path to take.”

A landmark event during his term as minister was the wool crisis. His eventual decisions for the industry were critically important and rather heroic as they faced fierce opposition from the whole industry, which seemed determined to do itself almost unlimited damage.

Some of his perspectives are all too relevant in our current political climate. “I have always been terrified by people in politics who are absolutely sure they are right, have God on their side or tell me they are ‘men of principle’. Such people seem able to blind themselves to their own hypocrisy and humbuggery – and are dangerous.”

I’m really looking forward to reading the book.

Further reading

Kerin, J.C. (2017). The Way I Saw It; The Way It Was: The Making of National Agricultural and Natural Resource Management Policy, Analysis and Policy Observatory, Melbourne. Available here: http://apo.org.au/node/76216

Pannell, D. (2014). Supply and demand: the wool crisis, Pannell Discussions no. 266.

304 – Predicting behaviour change by farmers

I have a new paper out describing ADOPT, the Adoption and Diffusion Outcome Prediction Tool. We’ve paid the money to make it Open Access, so I hope you will make it worth our while having done that by going to the journal web site and downloading the paper for free.

There are many hundreds of research papers on the adoption of new practices by farmers. Pretty much all of them set out to explain the relative contributions of different factors to the past adoption or non-adoption of particular practices in particular regions. There are a bunch of review papers that try to make sense of the voluminous literature (including a beauty by Pannell et al. (2006)).

However, neither the original papers nor the reviews set out to address an issue that really matters to many people working in the agricultural sector, in research, extension, natural resource management, policy, sales, etc. That issue is the likely future adoption of a new practice that has not yet been adopted. An interdisciplinary group of us set out to fill this gap by developing ADOPT.

There are a large number of users of ADOPT – there have been over 1000 downloads of the tool, and many examples where it has been used effectively in planning or evaluation of research, extension or policy.

Now we have published this paper, which describes how we developed and validated the tool, how it is structured, and some example of its use.

You can download the paper for free here and you can download the ADOPT tool for free here. If you do it quickly, you’ll be one of the first to get a new update of the model, just released on June 29.

Also available now is Version 1.0 of the “Smallholder” version of ADOPT, designed for use in developing countries. Download it from the same web site here.

Also see http://www.ruralpracticechange.net for a set of videos on the topic of farmers adopting new practices.

References

Kuehne, G., Llewellyn, R., Pannell, D.J., Wilkinson, R., Dolling, P., Ouzman, J. and Ewing, M. (2017). Predicting farmer uptake of new agricultural practices: a tool for research, extension and policy, Agricultural Systems 156, 115-125. Journal web site for free download of the paper.

Pannell, D.J. and Vanclay, F.M. (eds) (2011). Changing Land Management: Adoption of New Practices by Rural Landholders, CSIRO Publishing, Canberra. Available at the publisher’s website.

Pannell, D.J., Marshall, G.R., Barr, N., Curtis, A., Vanclay, F. and Wilkinson, R. (2006). Understanding and promoting adoption of conservation practices by rural landholders. Australian Journal of Experimental Agriculture 46(11): 1407-1424. Journal web site, or email David.Pannell@uwa.edu.au to ask for a copy.