Spitting In The Ocean

Efficiency Pricing Part 2

Two weeks after floating this idea of pricing the thing we want (nutrient reduction), instead of proxies for the thing we want (acres, installations), we don’t have any uptake yet. (I can hear those with experience in such matters laughing that I would even be looking at the clock a few weeks after suggesting a good idea to the Bay Program.) But, I’m going to assume that all the right people have read the piece. They just don’t see why they should believe it. They are not convinced yet.

If the new Bay restoration managers are to take the trouble to re-jig Maryland’s cover crop payments system, or re-write the enabling legislation for some of USDA’s conservation programs, they want to be assured that there is going to be a satisfactory pay-off. Because some guy on the internet asserts that this would be a good idea is not a very good reason for expending a lot of effort or going out on a political limb. Status quo interests may be undone by changing the pricing structure for water quality BMPs and, besides, a bother is a bother.

So let’s pull out the justification wagon and load that puppy up.

There are six different cropping systems (land uses) relevant to the cover crop BMP. Each leaves different expected residual nitrogen in the field (edge of stream loads) at the end of the cropping season. But those six different cropping systems vary in their edge of stream loads depending on whether they are in the coastal plain or the non-coastal plain. So there are really 12 different loading rates across those two hydro-geomorphic regions.

Some of the residual nitrogen on those fields which is expected to end up in streams can be taken up by cover crops. The rate at which cover crops do this depends upon: what seed is used, how it is planted and when it is planted. If you know what seed was used, its planting method and when it was planted, you can pair that information with your land use nitrogen load information to say how many pounds of nitrogen were kept out of the stream by planting cover crops on some given acre. That gives you a pounds/acre nitrogen load reduction by practice by land use.

The table below gives a truncated reporting of this. It is just for the coastal plain and it gives the five best and three worst pounds/acre reduction rates by practice.

Pounds Of Nitrogen Reduced by Cover Crops by Land-Use and Practice (lb/acre)
	LU1	LU2	LU3	LU4	LU5	LU6
Drilled rye early planting	10.822	15.150	12.365	3.371	12.337	10.906
Drilled rye normal planting	9.900	13.859	11.312	3.083	11.286	9.976
Other rye early planting	9.197	12.874	10.508	2.864	10.484	9.267
Drilled barley early planting	9.197	12.874	10.508	2.864	10.484	9.267
Other rye normal planting	8.420	11.787	9.621	2.622	9.598	8.485
More practices…	…	…	…	…	…	…
Drilled wheat late planting	3.252	4.552	3.715	1.013	3.707	3.277
Aerial wheat on corn early	3.033	4.246	3.466	0.945	3.458	3.057
Other wheat planted late	2.766	3.872	3.161	0.862	3.153	2.788

So, if you offer some single price/acre for planting cover crops, adopters will be drawn randomly from this table. Assuming that their costs are the same, you are no more likely to get the high load reduction rate than you are to get a low load reduction rate because they both get paid the same thing. But the dollars spent buying cover crops from acres with low reduction rates are buying way less nitrogen reduction than the dollars spent on acres with high reduction rates.

Consider what would happen if there were a single price/pound for nitrogen reduction. Our suggested price was $3.50/pound, so multiply that times each number in each cell in the table. That is what we would pay per acre to get a farmer to plant cover crops on those acres by those methods. Now, we are providing information to the farmer that he did not have before. Now we are letting him know more precisely how he can be useful (and make more money) in reducing edge of stream nitrogen loads. An incentive is provided to ensure greater reductions per $ spent.

Of course, there is not a single price/acre as the program is currently configured. MDA uses premiums to motivate farmers to plant earlier or in particular hot-spots. That is all to the good. But, comparing estimated load reductions and total expenditure for the 2008 program year with what $3.50/pound would generate, I calculate that traditional cover crops reduced about 1.14 million pounds of nitrogen for a total cost of about $6.67 million. If we priced nitrogen reduction at $3.50 per pound, $6.67 million would buy 1.91 million pounds of reduction. That is an additional 767,000 pounds of nitrogen reduction.

The question is, are there enough farmers who would profit at $3.50/pound from planting cover crops? I have run out of space here, but the answer is yes. They would likely over-subscribe at that price. So, the next question might be, is a 67 percent improvement in cost efficiency worth working for?

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