Iowa Nutrient Reduction Science Assessment

Cost Estimate and Outreach

John D. Lawrence

Associate Dean and Director

Ag and Natural Resources Extension

Iowa State University

Cost Estimates

• Acknowledgement– N and P Teams– Dr. Mike Duffy– ISU Ag Decision Maker Farm Management

• What is not included– Monetized environmental benefits– Adoption time

Overview

• Economic process– Direct estimates

– Indirect effects

• Challenges and remaining questions

• Outreach plans

Cost Estimation

• Focus on farm-level costs

• Price levels

–$5.00, $12.50, $0.50, $0.59

• No overhead costs

• No beyond-the-farm costs or benefits

• No reflection of a cost curve

Equal Annualized Cost

• Allows comparison across practices– Combine recurring annual cost and initial investment

• Annualized initial investment– Used design life of 50 years and discount rate of 4%– Practices with shorter life were replaced to 50 years

• Reoccurring costs– Operations– Inputs

Equal Annualized Cost

• Cost estimates based on current information– Structures based on recent experience– Operations based on 2011 ISU Extension budgets

and surveys for custom rate– Input prices based on 2011 actuals

• When appropriate, consider impact on corn yield

• Land retirement use 2011 Cash Rental Rate Survey

Positive EAC = CostNegative EAC = Benefit

• Examples of positive EAC– Cover crops– Installing bioreactors– Installing wetlands– Land use changes

Positive EAC = CostNegative EAC = Benefit

• Examples of negative EAC– Moving anhydrous ammonia and liquid swine

manure from fall to spring– Reduce fertilizer to recommended rate– Use nitrification inhibitor on fall applied N

• Compared to baseline application rates.

• Crop cost associated with corn yield impact

• Doesn’t account for other costs or risks

Cost per Pound Removed

• It is possible to calculate the EAC per pound removed.

• Why not start with lowest cost practice until it is exhausted then move to next lowest cost?

• Costs differ by site and region

• Shape of cost curve

Cost per Pound Removed N = Page 26, P = page 23

Nitrate-N Reduction %

(from baseline)

Cost of N Reduction $/lb (from baseline)

State Average EAC ** ($/acre)Practice/Scenario

Cover crops (rye) on ALL CS and CC acres 28 5.96 49Reducing nitrogen application rate from background to the MRTN 133 lb N/ac on CB and to 190 lb N/ac on CC (in MLRAs where rates are higher than this)

9 -0.58 -2

Cover crops (rye) on all no-till acres 6 5.97 45Sidedress all spring applied N 4 0.00 0Using a nitrification inhibitor with all fall applied fertilizer

1 -1.53 -3

Move all liquid swine manure and anhydrous to spring preplant

0.3 -74.36 -20

Moving fall anhydrous fertilizer application to spring preplant

0.1 -283.27 -20

Cost curves

Cost

Q

MC

ATC

AFC

AVC

Scenario Approach• Requires a combination of practices

• Example not optimized

• Identify example scenarios that achieves the targeted reduction– Professional judgment– Categories of practices– Round number adoption targets

• Model reductions and farm level costs

N P

Initial Investment (million $)

Total EAC* Cost

(million $/year)

Statewide Average

EAC Costs ($/acre)Name Combined Scenario

% Reduction from baseline

NCS1MRTN Rate, 60% Acreage with Cover Crop, 27% of ag land treated with wetland and 60% of drained land has bioreactor

42 30 3,218 756 36

NCS3

MRTN Rate, 95% of acreage in all MLRAs with Cover Crops, 34% of ag land in MLRA 103 and 104 treated with wetland, and 5% land retirement in all MLRAs

42 50 1,222 1,214 58

Example Combination Scenarios that Achieve N and P Goal From NPS

N P

Initial Investment (million $)

Total EAC* Cost

(million $/year)

Statewide Average

EAC Costs ($/acre)Name Combined Scenario

% Reduction from baseline

NCS8

MRTN Rate, Inhibitor with all Fall Commercial N, Sidedress All Spring N, 70% of all tile drained acres treated with bioreactor, 70% of all applicable land has controlled drainage, 31.5% of ag land treated with a wetland, and 70% of all agricultural streams have a buffer) - Phosphorus reduction practices (phosphorus rate reduction on all ag land, Convert 90% of Conventional Tillage CS & CC acres to Conservation Till and Convert 10% of Non-No-till CS & CC ground to No-Till

42 29 4,041 77 4

Example Combination Scenarios that Achieve N and P Goal From NPS

Summary of Example Scenarios

Initial Investment (million $)

Total EAC* Cost (million $/year)

Statewide Average EAC

Costs ($/acre)Name

NCS1 3,218 756 36

NCS3 1,222 1,214 58

NCS8 4,041 77 4

Cost Comparison

• EAC includes annualized initial investment– Comparing apples to apple slices

• Initial investment addresses feasibility– Cost share and incentives not included

• Annual operating costs tests enforcement– Cost of enforcement and verification not included

• Negative EAC a key issue

Other Economic Considerations

• These are farm level average cost estimates– Cost curve and high adoption rates

• No overhead costs– Implementation– Enforcement

• Infrastructure costs– Agribusiness– Construction

Other Economic Considerations• From individual to market

– Cover crops, 312,000 acres of rye for seed production, more than was harvested in 2011

– Bioreactors, 111,000 acres of trees – Fall to spring application, $194 million/year for

infrastructure costs

• Yield impact of delayed planting from more spring work

Other Economic Considerations• Impact of supply changes on price

– Corn $0.00136/bu– Soybeans $0.00625/bu– Alfalfa 0.8% / 1.0%

• Higher prices for sellers but higher costs for buyers – NFI change is about half GFI change– Price gain doesn’t offset production lost

Net Farm Income

• For a 2.3 bbu Iowa corn crop, GFI increases $230 million per dime.

• A dime price change in corn impacts Iowa NFI by $110 million in the same direction.

• Beyond farm consumers also impacted– Processors– Export customers

Challenges and Remaining Issues

• Benefits – Environmental benefits discussed, not monetized– Non-yield benefits of SOM not captured– Investments and practices will generate economic

activity

• Costs– Some practices have downsides– P surplus producers have higher application cost

Challenges and Remaining Issues

• Changes will lead to winners and losers• Unintended consequences, positive and

negative, not fully explored• High adoption rates

– Will have market implications– Markets implications change cost estimates– Will require time for logistics and costs

Challenges and Remaining Issues

• One state v. regional or national policy• Global response to change in US prices• Food price implications• Value of cleaner water locally and in the Gulf• Cost – benefit may differ by practice and

location

Outreach Plan• Announcement at PAT• Overview and detail at CAS• Overview at MAC• Dedicated website• Opportunity for comment

– Website– At meetings with detail– Public meetings– Formal comments