Summer 2007 - Vol. 7/No. 3

Putting a value on environmental services, quality

The SAFS project has been comparing the efficiency of three production systems managed under either conservation tillage or standard tillage (above.)

Ecosystem services and environmental quality are not bought and sold in traditional markets. A simple price variable, for example, representing the costs of reducing runoff does not exist. Instead, economists have developed the notion of “shadow prices” that can be estimated from production and environmental data that give either the value of a non-marketable “good,” such as a unit of indigenous nitrogen in the soil, or the abatement costs of reducing a “bad,” such as nitrates in water. Such shadow prices can be used to develop alternative production systems, help producers meet environmental goals at the lowest costs, and help policy makers cultivate incentive systems to reduce agricultural pollution.

This article quantifies the costs associated with two potentially polluting activities: mechanized trips across a field, which may generate air pollution; and total quantity of pesticides used in production, which has the potential to contaminate ground and surface water. In addition, we report the results of estimates that help to illustrate the productive and joint productive/environmental efficiency of alternative production systems.

Data
The data for this article is taken from the Sustainable Agriculture Farming Systems (SAFS) project. Three alternative production systems (conventional, lowinput, and organic) in a two-year rotation of processing tomatoes followed by field corn using furrowed irrigation are considered. In addition, each production system was managed using standard and reduced tillage, for a total of six distinct production systems for each crop with three replications of each. Three years of data were available.

To allow for comparability between crops, an index was constructed for desirable outputs (i.e., corn and tomato yields) that incorporates as weights any price premium for organic produce. Inputs were measured as total expenditures on 11 cost categories. Undesirable outputs would ideally be direct measures of quantities of pollutants; however, due to measurement difficulties in the field, none were available. Instead, we choose to use proxy variables that are likely correlated with these “bads”--namely, total number of trips across a field and total quantity of pesticides (herbicides and fungicides) applied. While these are certainly not ideal variables, they do provide the opportunity to value changes in management that are associated with polluting activities.

Table 1. Economic Total Factor Productivity (TFP) relative to Conventional Standard Tillage Corn, 2003, by Production System (Baseline=1)

Table 2. Distance function Estimates relative to Most Efficient Observation, by Production System (Most efficient=0)

Technical efficiency excluding environmental considerations
We first examine the estimated values of a total factor productivity (TFP) index, which compares the technical efficiency of each production system/tillage treatment by year, arbitrarily using standard tillage corn for 2003 as the baseline. The TFP index is defined as the ratio between the output and input quantities for each observation, with the baseline equal to one. Those observations with a TFP index greater than one are more efficient than standard tillage corn 2003. A TFP index less than one means the system is less efficient than standard tillage corn 2003. This index only uses marketable inputs and outputs without considering environmental variables.

Table 1 summarizes the results. Aggregating over both crops, the “Total” column shows that, on average, conventional systems (Conv) are most efficient, with organic systems (Org) slightly less efficient than winterlegume cover cropped systems (WLCC). This is generally true for corn and tomatoes separately as well, though the loss in efficiency in moving to an alternative production system is greater for corn than tomatoes. There is little difference between standard tillage (ST) and reduced, or conservation, tillage (CT) overall. However, conservation tillage is most efficient for corn, but standard tillage is most efficient for tomatoes. Thus, technical efficiency across crops and technologies are system-specific, and generalizations must be made with caution.

Technical efficiency including environmental considerations
In order to quantify our augmented efficiency and abatement cost measures, we use the concept of a “production possibilities frontier,” or PPF. A PPF shows the maximum level of outputs that can be obtained from a fixed set of inputs. In this case, we are concerned with production of both desirable outputs (crops) and undesirable outputs (environmental outputs as represented by our proxies). Any data point that lies on the frontier is considered “efficient,” in that one cannot increase desirable outputs without also increasing undesirable outputs. A data point lying inside the frontier is inefficient, in that either desirable outputs can be increased without increasing pollution, or pollution can be decreased without sacrificing crop output. The distance from such a point to the frontier is a natural measure of technical efficiency in the presence of jointly-produced outputs, including environmental “bads.” We call this index the Environmental Efficiency Index (EEI).

To obtain abatement costs, we use the frontier to describe the tradeoff between, say, reducing an environmental pollution proxy and the resultant decrease in desirable crop output. Assuming that one of the outputs has a true value given by its market price, then, the dollar value of the undesirable output can be easily recovered.

Table 2 shows the EEI that includes the environmental proxies discussed above (number of trips across the field and total amount of pesticides used) along with the yields and cost factors. Unlike the TFP index, a lower value indicates greater efficiency, with a value of zero suggesting production along the technology frontier (i.e., most efficient). Conventional production is still most efficient across both crops and tillage regimes, but the lack of pesticide application in the organic system is taken into account, thus moving it ahead of covercropped systems in the efficiency rankings. This pattern is again maintained for both corn and tomatoes, although the very small differences between conventional and organic production measures for tomatoes is worth noting as reductions in pesticide use do not appear to significantly affect the combined economic/environmental efficiency measure. Credit for reducing trips across the field with this combined measure results in conservation tillage systems ranked more efficient than standard tillage regimes in aggregate and for each crop individually.

Incorporation of environmental considerations into the efficiency analysis thus effects both the qualitative and quantitative classifications of each of the production systems by crediting the “production” of environmental quality rather than simply crop yields. In the case of corn, there is little compelling evidence to suggest that non-conventional production systems should be promoted (say, through policy instruments) on environmental grounds, at least on the basis on this information. For tomatoes, however, it appears that organic production systems have the potential to increase environmental quality while simultaneously increasing output. Cover cropping fares the worst in terms of technical efficiency. However, we have not included a proxy for pollution resulting from fertilizer, which could change the results. Of course, profitability concerns of individual growers (including the costs of potentially switching to a new system) are likely to dominate production choice decisions.

Table 3: Estimated Shadow Prices of Undesirable Outputs by Crop, 2005$

Shadow prices
We estimated the shadow prices of avoiding the use of pesticides and reducing the number of trips across the field as a way of valuing the cost of adopting sustainable farming practices. The average shadow price estimates overall are $37 per pint of herbicide and $8 per trip across the field, although they have quite a large range (Table 3). In other words, the opportunity cost of abating one pint of herbicides is just under $40, while the opportunity cost of foregoing one trip across the field is just under $10. Alternatively, a producer operating at a zero herbicide level could increase output value by approximately $37 if an additional pint of herbicide was applied. Prices for each proxy are generally higher for corn ($59 and $10) than for tomatoes ($16 and $7) meaning that adoption of sustainable farming practices is more likely for tomatoes than corn. The organic system tends to admit shadow prices higher than the overall average. On average, standard tillage system shadow prices for herbicides are lower than conservation tillage systems, but higher than conservation tillage systems for number of trips across a field. These results imply that standard tillage systems are more reliant (in terms of output tradeoffs) on tillage operations than conservation tillage systems, which makes sense given the objectives of the conservation tillage regime. The results also imply that conservation tillage systems are more reliant on herbicides than standard tillage systems, which is also intuitive.

Overall shadow prices for abatement of herbicides are generally higher than the comparable input cost (between $3 and $20 per pint), while shadow prices for tillage are slightly lower than the approximate $20 per acre. One interpretation is that the increase in revenue from using herbicides is greater than the cost of herbicides. In contrast, the value of an additional tillage operation is less than the cost of the tillage operation. It follows that many farmers operating under conventional production systems would be more likely to reduce the number of tillage operations but less likely to reduce the amount of herbicide used based on current market conditions.

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