Economic Concepts Related to Appraisal II

Outline

• What is meant by economics• Sustainable agriculture• What are the basic issues related to appraisal• Example of soil erosion

Economics of Sustainability

• Economics– It is not the study of money, it is the study of

scarce resources• Microeconomics is the study of the firm or

individual• Macros economics is the study at the societal

level

Economics of Sustainability

• Some of the costs and/or benefits are pecuniary while others are non-pecuniary

• In addition, some of the costs and/or benefits do not fall to the ones who create them (externalities)

• When studying economics we are trying to see how an individual or society allocates its scarce resources to achieve its goals

Sustainable Agriculture: What Does it Mean

– “The appropriate use of crop and livestock systems and agricultural inputs supporting those activities which maintain economic and social viability while preserving the high productivity and quality of Iowa’s land.”

– “ … not a concretely defined set of management strategies and technology, but an approach which targets the enhancement of natural processes…”

Economics of Sustainable Agriculture

1. Profit2. Ability to generate an income3. Risk4. Labor use including timeliness, quality, and trade-

offs5. Energy use

Economics of Sustainable Agriculture

6. Environmental Quality7. Impact on rural communities8. Impact of food supply including safety and cost9. Structure of agriculture10. Efficient and effective use of resources

Appraisal Issues

1. Valuing benefits and costs1. Externalities2. Non-market goods and services3. Common property4. Resource depletion

2. Resource Distribution3. Time4. Changes in technology5. Changes in preferences

Primary Reason for Owning Farmland Based on Place of Residence

0%

10%

20%

30%

40%

50%

60%

Current Income LT Investment Family/Sentimental Home/Way of life Recreation

Lives in Iowa Does not live in Iowa

Erosion Class• None or Slight

– More than 7 inches of A or A plus E Horizon• Moderately Eroded

– 3-7 inches• Severely Eroded

– Less than 3 inches• Overwash

– 8-18 inches of recently deposited material above A Horizon

WATER EROSION – WINNESHIEK COUNTY(LOOKING RIGHT AT HARVEST)

WATER EROSION – CHICKASAW COUNTY

WATER EROSION – WINNESHIEK COUNTY(LOOKING CENTER)

WATER EROSION – BUTLER COUNTY

WIND EROSION – BUTLER COUNTY

BREMER COUNTY 1999

BREMER COUNTY – 1999

PESTICIDES, NUTRIENTS AND SEDIMENT –

WHERE DO THEY GO?

ROOT RIVER AFTER 2” RAIN

THE MISSISSIPPI RIVER

SOURCE: NATIONAL OCEANIC AND ATMOSPHERIC ADMINISTRATION

POINT WHERE THE WATERS OF THE MISSISSIPPI RIVER MEET THE WATERS OF THE GULF OF MEXICO

AGRICULTURE AND HYPOXIA

• HYPOXIA = LOW OXYGEN• < 2 PPM OXYGEN WILL NOT

SUPPORT FISH AND OTHER AQUATIC LIFE

• NUTRIENT ENRICHMENT FROM FERTILIZERS AND EROSION (SEDIMENTS) ARE MAJOR CAUSES OF HYPOXIA

• THE CORN BELT IS A PRIMARY SOURCE FOR NUTRIENT ENRICHMENT

HYPOXIC ZONE IN THE GULF OF MEXICODECEMBER, 2007

SOURCE: NATIONAL OCEANIC AND ATMOSPHERIC ADMINISTRATION

Erosion Cost Categories

• Individual farmer– Fertility loss– Reshaping of field landscape– Loss of organic matter

• Society– Water quality, recreation, navigation, drinking water,

etc.• Land owner

– Decrease in value of the land

External Costs• Cost of erosion estimates range from $19 to $6.20

per ton• In the Corn Belt there was 3.9 T/acre water

erosion and .2 T/acre wind erosion• Range from $77.90 to $25.42 per cropland acre in

the Corn Belt• Tegtmeier/Duffy estimates from $14.09 to $45.68

for all external costs• USDA average for soil $25.42 versus total $29.89

Total Soil Erosion in Tons per Cropland Acre

0

2

4

6

8

10

12

1982 1987 1992 1997 2003

IA US

Sheet and Rill Erosion in Tons per Acre in Iowa

0

1

2

3

4

5

6

7

8

1982 1987 1992 1997 2003

Chickasaw

Clayton

Clinton

Des Moines

Dubuque

EmmetFlo

yd

Fremont

Hardin

HumboldtLyo

nMills Page

Pocahontas

Polk

PottawattamieSto

ryTaylo

r

Woodbury

Wright

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%Percent of Iowa's Farmland with Eroded Soils

Average 19%

Corn Soybeans CSR -

2

4

6

8

10

12

14

16

18

20

Change in Corn, Soybean and CSR Based on Erosion Phase

Maximum Minimum Average

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 200%

2%

4%

6%

8%

10%

12%

Dollar Damage as a Percent of ISU Land Value

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 310.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

Range in Percent of Land Value Lost for 154 Soils in 20 Iowa Counties

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 200.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

Percent Range in Total Value of a Counties Land Value Lost Due to Eroision, 2010

Chickasaw

Clayton

Clinton

Des Moines

Dubuque

EmmetFlo

yd

Fremont

Hardin

HumboldtLyo

nMills Page

Pocahontas

Polk

PottawattamieSto

ryTaylo

r

Woodbury

Wright

$-

$50

$100

$150

$200

$250

$300

$350

$400

$450 Average Loss per Acre Due to Erosion

CSR Value CC

CSR Average$245 per Acre

Return Average$207 per Acre

Erosion

• Do farmers take erosion into account when making their decisions?

• Do land buyers/renters consider erosion level when acquiring land?