Assessing Tradeoffs Between Cane

Production and Water Quality

Peter Donaghy

DPI&F

John Rolfe, Judith Wake

CQU

Overview

Increasing interest in market-like mechanisms to manage natural resources

Give farmers financial incentives to produce environmental outcomes as well as normal production

Design and take-up are crucial issues Case study dealing with cane farmers in

Sandy Creek catchment

Market based instruments

Extensively used in US Developing interest and application in

AustraliaBushTender in Victoria

Range includes competitive tenders, offsets, cap & trade, eco-labelling, tradeable development rights, baseline & credit, mitigation banking

Key economic advantages

MBIs work by structuring incentives in more appropriate ways and allowing competitive pressure to operate Pressure to provide services at lowest cost Competition between participants means

more efficient allocation of resources Process also reveals opportunity cost

information and addresses problems of asymmetric information in NRM

Asymmetric information

Government/NRM bodies know what are priorities for environmental protection

Farmers know how to manage land and what costs of changed management are

Neither group has good access to information held by other side

Need a negotiation process to find best solution

Why is design important?

Many MBIs involve the setting of property rights and exchange mechanisms so there is certainty and confidence in tradeEg rules for allocating funding under a

conservation tender If the ‘rules’ are not appropriate, then

may result in perverse outcomesOften good to test this first

What we did in this project

Designed some ‘trial’ cane farms Held 3 workshops with groups of cane

farmers Asked farmers to submit bids for

different conservation actionsRiparian buffer stripsFertiliser reductionsConversion to minimum till

Contract details

Described voluntary agreements Contracts with local NRM body 5 year agreement Annual payments each year Payments for farmers to perform

agreed management actions Simple monitoring process

Why conservation tenders?

Negotiates fairly with growersDoes not involve more regulationRecognises existing property rights

EfficientGets better outcomes for government

spendingLets farmers find most efficient way of

meeting the outcomes

Flexibility of a tender system

Focus is on growers suggesting things they might do to achieve conservation outcomeIn exchange for payments

Different growers might suggest different actions

Our workshops

Gave each farmer a ‘trial’ farm Farms were all much the same

Five different soil types5 x fallow, 5 x plant, 5 x 1st ratoon, 3 x

2nd ratoon, 2 x 3rd ratoonHouse, access roadsRiver on one side, creek on the other

Riparian grass strips

Asked farmers in workshops to indicate on their property map where they would create grass stripsCould put them on river or creekCould make them any width

Had to add up areas of different soil types; 4 small squares = 1 hectare

Had to fill in a bid sheet

Bidding cardDate ________________________Round ________________________Property ________________________

Soil Type Hectares Involved

Non calcic brown (Pioneer)

Yellow podsolic (Marian)

Grey clay (Brightly)

Soloths (Kinchant)

Sand

Amount of money needed (each year for 5 years) $ ___________________

Performance of a round

Each farmer identified a buffer strip on a map

Identified area of cane that would not be grown

Identified amount of money required We assessed environmental benefits of

each buffer strip Identified most cost-effective bids Awarded prizes to three best bids

Riparian Filter Strip Bids

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

1 2 3 4 5 6 7 8 9 10 11 12 13 14

Bid Number

$/H

a

Group 1 Group 2 Group 3 Expert panel

How we assessed bids Designed our own metric in a spreadsheet Four main components

Environmental Benefit Indices Area of each soil type Width of buffer zone Stream type

Metric ranked bids based on their potential to achieve water quality improvement

Compared this to $ bids

Variation in Opportunity Cost

Grass filter strip bids varied from $97/ha to $3,563/ha

Large variations in grower opportunity costs. 10 cheapest – 163ha for $37,64510 dearest – 127ha for $348,313

Variation facilitates cost efficiencies

Regression Analysis of Bids Coefficient Std. Error Significance

Constant -118890.966 24911.123 .001

Non calcic Brown (Pioneer) 1570.052 561.571 .017

Yellow Podzolic (Marian) 6576.558 985.499 .000

Grey clay (Brightly) 1199.198 694.511 .112

Soloths (Kinchant) 5151.576 1165.339 .001

Sand -5959.870 1950.584 .011

Age 761.516 280.196 .020

Years in area -758.044 314.536 .035

Area of cane farmed 66.699 34.221 .077

Off farm income 6452.019 11136.002 .574

% off farm income -713.525 273.310 .024

Balance prod and env 6930.531 4207.391 .128

Interest in being paid 959.220 4023.138 .816

Preferred agency 644.013 3444.284 .855

Round -3595.498 6726.095 .604

Property type 8328.346 3035.536 .019

Group 8288.303 3892.936 .057

Property area 327.738 113.638 .015Adjusted r2 = .96

Average Bid Value SummariesManagement action Average bid from

Expert panelAverage bid from cane

farmers

Establishing grass filter strips $1,083 /ha $1,387 / ha

Reducing fertilizer applications (N and P) by 50%

$290 / ha $727 / ha

Adoption of minimum tillage $128 / ha

Using a legume crop as a ‘green fertilizer’ at least every 5 years

$529 / ha

Who Are the Experts?

Farmers bids reflect additional factors other than farm productivity

Social, demographic and farm characteristics influencing bids

These factors not apparent from farm productivity models

Conclusions

Wide variation in opp costs between cane growers both within and across management actionsReflects heterogeneity of

farms/farmersCost effective to focus on growers

with lower opportunity costs Ineffective nature of fixed rate

approach (eg. devolved grants)

Conclusions

Results provide insights into factors other than farm production that affect bid formulation. Farmers views different to panel of experts!!

Process skills farmers to participate in the real deal!!

Contract design including monitoring and enforcement important

Construction of metric is difficult, limited to available data and crucial to process