Farm Return and Land Price Effects from Environmental Standards and Stocking Density Restrictions

Agricultural and Resource Economics Review, Oct 2004 by Weersink, Alfons, deVos, Greg, Stonehouse, Peter

This study assesses the economic and environmental effects to hog finishing farms from residual taxes/standards and restrictions on manure application and stocking density. Economic effects are measured in terms of net farm income and land prices, while levels of ammonia and excess nitrogen and phosphorus proxy the environmental effects. Any environmental policy requiring the need for additional land comes at a small cost to farmers who have access to adequate neighboring land. If this is not the case, then manure application and stocking density restrictions are expensive since the producer is basically forced to either purchase land or reduce hog production levels.

Key Words: land value, manure application restrictions, stocking density

Public concerns over the environmental consequences of livestock production and the concentration of that production in larger farm units has led to more numerous, and increasingly more stringent, regulations on farm practices. These regulations have evolved from simple ex ante restrictions, such as minimum separation distances of new barns from waterways, to ex post controls or incentives on management practices. Although there is a geographical disparity in the extent of the legislation among countries and jurisdictions (Beghin and Metcalfe, 2000), nutrient management standards and/or stocking density restrictions are becoming part of the regulatory constraints facing livestock farmers. For example, confined animal feeding operations (CAFOs) in the United States will not be able to spread manure at a rate greater than the crop nutrient demands. Similarly, many Canadian livestock farmers will be required to have in place a nutrient management plan (NMP) that includes a verification of stocking density to ensure nutrient standards are not exceeded, as well as an indication of how nutrients are to be monitored and applied.

The restrictions will come at a cost to farmers, as several studies have concluded that the disposal expenses of manure outweigh its nutrient value as a replacement for purchased fertilizers (Boland et al, 1999; Boland, Preckel, and Foster, 1998; Roka and Hoag, 1996). For example, Schnitkey and Miranda (1993) found that restrictions of phosphorus application reduce hog numbers by approximately the same percentage as the reduction in required phosphate runoff. Den Ouden (1997) estimated the direct cost of regulation in the Netherlands to be between 5% and 10% of the average total cost of hog production, and similar estimates of approximately $2-$5 per hog cost increases associated with nitrogen application standards were obtained by Lauwers, van Huylenbroeck, and Martens (1998). Fleming and Long (2002) estimated average net farm revenue would fall by 7% if manure can only be applied on land with slopes of less than 12%. The impacts of land availability prominent in proposed environmental legislations were not addressed by these studies.

Recent papers by Kaplan, Johansson, and Peters (2004), and Johansson and Kaplan (2004) examine the implications of land constraints of manure application at the regional and sector levels in the United States, while Vukina and Wossink (2000) estimated the increase in Dutch land prices in regions where a manure quota restriction was binding. These studies show the price effects of land constraints and the regional variation in impacts, but do not examine how individual operators would respond to application restrictions under alternative conditions. Using survey data on land availability, manure levels, and application rates for U.S. swine farms, Ribuado, Gollehon, and Agapoff (2003) found that most hog farmers apply their livestock waste at levels greater than the needs of a nitrogen-based (N-based) or phosphorus-based (P-based) nutrient management plan. Meeting the requirements of a nutrient standard would require large farms to find significant amounts of land (particularly for a P-based standard), but the costs of acquiring such land were not addressed by Ribuado, Gollehon, and Agapoff (2003).

Previous studies have not provided a comprehensive assessment of the changes in all major residuals from hog farms [ammonia and excess nutrients (nitrogen and phosphorus)] and farm abatement costs prompted by the major types of manure legislation. This study develops a theoretical and empirical model to examine the farm-level effects on returns, land values, and residuals from pending application and stocking density restrictions. While farmers can change rations and handling systems in response to policy efforts, it will be demonstrated in this analysis that the financial impacts depend significantly on the availability of land for manure disposal.

The objective of this study is to assess the economic and environmental effects to hog finishing farms from residual taxes/standards and restrictions on manure application and stocking density. In the following section, a theoretical model is presented which determines the shadow values of manure and land along with the effects of environmental policies on those values. We then outline the optimization model used to determine the producer choice of management system with each policy and the associated residual levels. The model is based on a hypothetical hog finishing farm in the livestockintensive region of southwestern Ontario where the geographic conditions are similar to states in the U.S. Great Lakes region. In the next section, the effects of taxes/standards on ammonia, excess nitrogen, and excess phosphorus, together with restrictions on manure and stocking density, are evaluated in terms of net farm returns, residuals, and land prices. The paper concludes with a discussion of the policy implications.