Agriculture is intrinsically linked to the environment: roughly
half of all land in the lower 48 States is farmland, including
cropland, land in the Conservation Reserve Program, pastureland,
and rangeland. Both crop and animal production generate pollutants
that enter the air as well as surface and ground waters. The Natural
Resources Conservation Service estimates that the annual loss of
soil from water erosion is approximately 1.07 billion tons per
year. The U.S. Environmental Protection Agency (EPA) estimates,
based upon areas sampled, that pollutants originating from this
runoff contribute to an estimated 60 percent of impaired river
areas, 30 percent of impaired lake areas, 15 percent of impaired
estuarine areas, and 15 percent of impaired coastal shoreline.
Agricultural pollution is difficult to control. For one thing, agricultural
pollutants are transmitted from widely dispersed sources, such as through runoff
from many individual farms. For this reason, programs to address agricultural
pollution have remained largely voluntary.
However, growing evidence suggests
that good economic performance is compatible with good environmental performance.
For example,
firms in the Dow Jones Sustainability
Index (companies that incorporate environmental and societal concerns into
their long-term economic investment strategies) outperformed the 2,500
largest capitalized companies that make up the Dow Jones Global
Index (with cumulative
gains in nominal market value of 85 percent compared with 57 percent) between
1993 and 2003. The positive correlation between environmental and economic
performance is especially apparent in industrial sectors with substantial
exposure to environmental risk. This evidence challenges the
traditional notion that
complying with environmental regulations saps profitability and suggests
that going “beyond compliance” can result in a competitive
advantage. For example, firms with better environmental records
may be more attractive
to investors due to reduced compliance costs and a lower risk of future liabilities.
Recent ERS analysis suggests that agricultural producers can also benefit
economically by voluntarily adopting environmentally beneficial practices.
An efficient
farm would naturally minimize unnecessary applications of pesticides and
fertilizer, enhancing the bottom line as well as minimizing environmental
impacts. But
additional incentives may exist for farms to invest in environmental management.
For example, those producers who accurately anticipate regulations or changes
in consumer tastes for food grown with environmentally friendly technologies
could gain a competitive advantage in the marketplace.
In other words, incentives facing agriculture are not that different
from those facing other firms trying to plot a sustainable growth path.
Specifically,
ERS research found this to be true for U.S. corn producers who use crop
residue management (CRM) to minimize damages from agricultural runoff.
These producers
enjoy a clear economic edge over non-CRM corn producers.
Nature of Agricultural Pollution
There are a few cases in which regulations affect agriculture directly.
These include the Food Quality Protection Act of 1996, which enables the
EPA to regulate
pesticide use; the Endangered Species Act, which allows the Federal Government
to restrict agricultural practices as part of species recovery plans; and
the Federal Water Pollution Control Act of 1972 (including the Clean Water
Act
provisions), which requires landowners to obtain a permit before discharging
pollutants into wetlands linked to navigable waters and restricts manure
management practices on concentrated animal feeding operations.
Yet, these affect only a subset of agricultural producers. Agricultural
rowcrop production is for the most part exempt from Federal environmental
regulation.
Many regulatory approaches used in other industries are not well suited
for agriculture. Agricultural pollutants are transmitted through runoff,
through
groundwater leaching, or through the atmosphere, so it is difficult to
identify individual sources of excessive agricultural pollutants in a
stream or lake.
Similarly, the amount of pollutants leaving a particular farm in a particular
year may not be “excessive,” but, over time and combined with
runoff from other farms, these pollutants may contribute to a significant
degradation
of U.S. air, water, and soil.
For the most part, U.S. agricultural policies have relied on voluntary
programs—such
as the Conservation Reserve Program and the Environmental Quality Incentives
Program—to reduce or mitigate impacts of agricultural production on
the environment. Highly erodible acreage is subject to conservation compliance
requirements, which tie the receipt of most Federal farm payments to the
adoption
of an approved soil conservation system. Although 87 percent of all corn
farmers participate in farm commodity and environmental programs, only 30
percent operate
highly erodible lands. Yet, 60 percent of corn farmers use crop residue management,
even though many do not need to in order to meet conservation compliance
requirements. Links between economic performance on U.S. farms and their
environmental management
can be identified regardless of the regulatory environment.
U.S. Corn Sector
Corn production occupies a large share of land used in agriculture—76
million acres—and generated $19 billion in sales in 2001, over
75 percent of total U.S. grain production. In addition, corn production
uses more than
40 percent of commercial fertilizer applied to crops. Rainfall and snowmelt
can cause significant erosion on cornfields, which has been linked to
declining soil quality, contamination of surface-water drinking supplies,
and degraded
aquatic habitats and recreational opportunities. Thus, the environmental
stewardship of corn producers has a significant bearing on the overall
environmental performance
of U.S. agriculture.
Many management technologies are available to mitigate the environmental
impacts of erosion and agricultural runoff from grain production. Such
practices include
alternative fertilization, tillage, crop rotation, and pesticide regimes.
ERS research has focused on one such practice: conservation tillage
or crop residue
management (CRM). Conventional or “clean tillage” practices
turn over soil in order to clear away the remains of the previous crop
and prepare
the seedbed prior to planting. With CRM, the producer plants the new
crop directly into residue from the previous crop. This practice has
been used
for several
decades because it reduces area planted or yields only slightly, yet
significantly decreases soil loss and agricultural runoff relative to
conventional tillage.
Agricultural engineers estimate that soil erosion can be reduced by a
third if 15 percent of after-harvest residue from corn is left on the
field rather
than turned under by tilling. Higher rates of CRM (i.e., leaving more
crop residues on top of the soil) will reduce soil erosion even further,
but at
a diminishing rate.
On the other hand, adoption of a specific environmental management system,
such as CRM, by itself does not necessarily result in overall improvements
in environmental performance. Environmental performance is multifaceted
and improvement in one area may come at the expense of another. For example,
use
of CRM sometimes requires higher pesticide use, in which case reduced soil
erosion must be weighed against a greater potential for pesticide runoff.
Good Environmental Managers Are Also Efficient
Recent ERS research indicates a relationship between corn producers’ economic
efficiency and their investments in environmental management, with
CRM adherents enjoying a clear economic edge over farmers using
conventional
tillage. The
research was based on data from the 2001 Agricultural Resource Management
Survey. The average total resource cost (which includes land and operator
labor costs
as well as material inputs) across all farms producing corn was $1.78
per dollar of output. The average was 31 cents lower for CRM corn farms
versus
non-CRM
corn farms. The two groups vary in other ways as well. For example,
CRM users generally operate larger acreages (273 acres versus 151
acres on
non-CRM
farms) and had higher yields per acre (131 versus 121 bushels.) These
differences complicate efficiency comparisons.
A number of studies have noted that CRM tends to lower costs of labor,
equipment, and fuel in corn production, and that these costs savings
more than offset
declines in crop yields or increased pesticide use. The gap in economic
efficiency is observable not only at the mean, but among both lowest
cost and highest
cost farms as well. Of course, economic efficiency varies widely among
both adopters and nonadopters of CRM, due to underlying differences in
management
and growing conditions. Along the full range of corn farms, those that
employ CRM are more efficient than those that do not. In general, the
gap in efficiency
between the two groups grows as total costs per dollar of output increase.
The benefits of CRM vary with soil and climate conditions, among other
factors. About two-thirds of CRM corn farms are found in the Heartland,
the most favorable
climate for corn production; CRM is less likely to be found in the northernmost
reaches of the Heartland.
Studies of publicly held businesses
use stock prices to examine the correlation between economic
and environmental
performance. In lieu of stock prices, ERS uses the “total
farm expense ratio,” or total resource costs per dollar
of corn output, as a measure of a farm’s economic performance
or efficiency. This measure of farm efficiency is endorsed
by the Farm Financial Standards Council.
The data used in the analysis of crop
residue management (CRM) and farm efficiency come from
the 2001 Agricultural
Resource Management Survey (ARMS) of U.S. corn farm operators.
Our subsample of 1,544 corn producers, when expanded, represents
94 percent of all acres planted to corn for grain. (Full
coverage is not possible because detailed corn data were
drawn only from the 19 highest producing States). ARMS is
USDA’s primary source of information on the financial
condition, production practices, resource use, and economic
well being of America’s farm households. Sponsored
jointly by ERS and the National Agricultural Statistics Service
(NASS), ARMS began in 1996 as a synthesis of the former USDA
cropping practice, chemical use, and farm costs and returns
surveys, which dated back to 1975. ARMS data are essential
to USDA, congressional, administration, and industry decisionmakers
when weighing alternative policies and programs that touch
the farm sector or affect farm families. In short, ARMS is
the mirror in which American farming views itself.
Detailed cost and return data allow
for assessment of the efficiency of the corn operation
within the overall farm.
Corn returns are calculated as the market value of a farm’s
corn output, but do not include the value of government payments
received. Costs are calculated as the sum of the value of
all purchased inputs and the opportunity costs associated
with land, capital, and labor. While both prices and quantities
are available from the ARMS for many purchased inputs such
as chemicals, fuel, and seeds, the cost of some resources
must be estimated (such as the cost of replacing capital)
based on the value of a farm’s corn output relative
to the value of all other outputs. The value of an operator’s
own labor is estimated on the basis of wages paid to farm
operators working off-farm, and cropland is valued at the
cash rental value for similar acreage in the area.
The analysis cited in the main text
compared total resource costs of CRM users versus nonadopters.
Total resource costs
include operating costs (items used as inputs in corn production),
the annualized cost of maintaining the machinery and other
capital invested, and the cost for other resources such as
land and the operator’s labor. These costs averaged
$1.78 per dollar of output. Average operating costs alone
were $0.76 per dollar of output, and average operating and
ownership costs (excluding land and operator labor) were
$1.20 per dollar of output.
Approximately 60 percent of corn farms reported using CRM
in 2001. Farm-level data show that the best way to predict
whether any individual farm uses CRM is whether the farm
has used it in the past. Farms that operated acreage particularly
susceptible to erosion due to soil type, the lay of their
fields, or the amount of rainfall received were also especially
likely to adopt CRM. Farmers with highly erodible fields
(about 20 percent of all corn farms operate such fields)
are required under Conservation Compliance to apply an approved
soil conservation system in order to maintain their eligibility
for commodity program benefits. Interestingly, farms that
are more efficient economically were also more likely to
adopt CRM than less profitable farms, testament to the dual
economic and environmental payoff of CRM adoption.
Corn production
survey data (2001)
Unobservable differences (such as management abilities) between
the groups are important in determining the CRM premium, affecting
both the decision
to adopt CRM as well as the economic efficiency of the corn enterprise. As
a result, even with the promise of increased economic efficiency, some farms
may not switch from conventional tillage to residue management. Nonadopters
may have lower overall management abilities, they may believe that conventional
tillage simplifies their overall farm management, or off-farm work may preclude
the deployment of management-intensive production systems. (CRM use requires
an operator to pay closer attention to moisture and weather conditions during
the planting season, especially during cool and damp weather.) The average
economic efficiency of CRM users, after correcting for unobservable sample
selection effects, was estimated to be $1.05 (in other words, on average
$1.05 of costs were incurred in the production of a dollar’s worth
of corn). Compared with the overall average ($1.78), this represents a premium
for CRM adoption of 73 cents, much higher than the 31-cent premium found
from a simple comparison of adopter and nonadopter means.
Going Beyond the Bottom Line
This study builds on the growing literature that documents and explains the
positive relationship between environmental performance and financial performance
within and across many industrial sectors, especially those with considerable
exposure to risky and undesirable environmental outcomes. In general, improved
environmental performance over the past 15 years in these industries has been
the result of environmental regulation; innovation has taken place in part
because of the need to comply with those regulations. However, a growing number
of firms in all sectors have voluntarily introduced measures that go beyond
compliance and have simultaneously improved economic performance. This trend
suggests that industry can be a major force in improving environmental conditions,
not just in the U.S. but worldwide.
Might not the same be true for agriculture? U.S. agriculture contributes
more than $80 billion a year to GDP and has significant links to the environment.
Although agriculture has not been heavily regulated with respect to its environmental
impacts, it is coming under increasing scrutiny in this regard from some consumers.
Affluent consumers are demanding more environmentally benign products, and
large foodservice firms are responding. Agriculture too has the potential to
improve environmental conditions through efforts that go beyond compliance
with program requirements. The extent to which this potential is realized will
depend on the market and policy incentives that shape farmers’ decisions.
In the corn sector, many farmers are employing crop residue management practices
voluntarily. Although, in part, CRM use is likely the result of the desire
to maintain eligibility for farm program payments, CRM also brings demonstrable
efficiency gains to farmers. So why have 40 percent of the corn farms sampled
not adopted this technology?
For one, farmers may consider the benefits small relative to other ways that
can improve profitability. Moreover, year-to-year fluctuations in costs and
returns may obscure the returns to CRM. The technology may also be less suited
to some regions and soil types. In particular, CRM adoption rates have been
lower in colder and wetter climates. However, our results indicate that even
in these areas corn producers adopting CRM on their corn acres were no less
profitable than nonadopters. The data behind the ERS survey, although extensive,
are unfortunately not comprehensive enough to control for everything affecting
farm profitability, and some of these factors could help explain nonadoption.
Farmers ultimately make “bottom-line” decisions in a context that
includes not only market conditions but also regulations, voluntary incentive
programs, and household goals and objectives. While our findings indicate that
many farmers will choose to go beyond compliance with program requirements,
whether farmers go “far enough” to meet broader environmental objectives
remains an open question.
This article is drawn from...
“ Beyond Compliance: Sustainable Business Practices and the Bottom Line,” by
Dennis Aigner, Jeffrey Hopkins, and Robert Johannson, American Journal
of
Agricultural Economics, December 2003.