This post will discuss the article, “Cost-Effective Targeting of Land Retirement to Improve Water Quality with Endogenous Sediment Deposition Coefficients” (Madhu Khanna, Wanhong Yang, Richard Farnsworth, and Hayri Önal; published in the American Journal of Agricultural Economics, 2003).  The article is an analysis of the current method of encouraging land retirement as employed by the Conservation Reserve Program.  The CRP presently assigns a score to each “parcel” of land that is representative of the benefit obtained by retiring said parcel.  Using this method, Illinois seeks to reduce sediment deposition, nutrient deposition, and increase the populations of certain animals.  This paper seeks to improve the existing framework by providing a manner in which to determine which parcels of land are most desirable for retirement, and develops a parcel-specific rental policy to make land retirement more efficient.  The paper concludes that their methods can reduce the cost of desired state goals by 38.6%.

Article Summary

To simplify the complex problem of land retirement schemes, we must first understand the current system.  The state of Illinois desires to: reduce off-site sediment loadings (or, the amount of sediment that erodes from a parcel of land) by 20%; reduce off-site nutrient loadings (or, the amount of sometimes harmful nutrients used in farming that wash away from a parcel of land) by 10%; increase populations of waterfowl and known endangered species by 15%; and increase the native stocks of water-dwelling animals in the lower Illinois River by 10%.  The CRP attempts to meet these goals by allowing farmers to retire land in sensitive areas.  This land is then allowed to return to a natural state, and the farmer receives a rental payment from the state roughly based on the value of that land.  This paper then argues for a more efficient method of meeting these goals, and describes a new rental payment system.

In the early portion of the article, Khanna et al argue that the current rental-based system for retiring land to protect watersheds is inefficient and does not reflect the differing value among land parcels in the same area.  Currently, the system used is based largely on simplicity; to keep costs of administration low, individual land parcels are not valued based on detailed information on the land (such as soil, slope, distance from water, flora on the land, or the characteristics of nearby land).  Instead, all land within a given distance of a water body is valued equally.  This is not only cheaper to administer, without the increased cost of geological surveys of land desired for retirement, but also appears fairer to farmers who may not understand the sediment deposition characteristics of a given parcel of land.  Conversely, Khanna et al believe that incorporating hydrological and geographic information system (GIS) data will allow for a more efficient allocation of rental payments to land that is highly valuable for retirement.

[caption id=”attachment_437” align=”aligncenter” width=”500” caption=”Sloping prairies near water such as this are ideal for retirement.”][/caption]

The conceptual framework for the value of land parcels is quite complicated and takes into account a wide variety of factors reflecting the value of land.  Recreation of the complicated math here would be ineffective, suffice to say that the final outcome is that the current system, called the Environmental Benefits Index (EBI), fails to account for off-site sediment abatement, location in a flow path within a watershed, parcel-specific deposition coefficients (which determine the amount of sediment that a parcel will absorb if retired), and the affect of up-slope land use on down-slope deposition coefficients.  This results in an inefficient allocation of rental payments to lands whose value for retirement may be lower than what is paid.

The next step the article takes is to determine the most efficient method of determining the rental payments that the state should make to farmers who retire land.  One option is a rental cap for an entire watershed which sets the maximum amount that will be paid for retired land.  Under this system, farmers will be motivated to retire land with the lowest value as cropland, as opposed to that land which most efficiently achieves sediment deposition goals.  The second option is a marginal value payment per acre.  Unfortunately, determining the value of each acre of land would be incredibly complex.  To make this process easier, the authors establish a system where only the three land parcels closest to a water path are considered eligible for retirement.  Since determining the value of each parcel would be time-consuming, the authors elect to consider all three together and analyze them for each possible combination of retirement or crop use.  Equations determined earlier in the paper can help to establish an efficient rental payment for each parcel of land.

The most efficient rental scheme and means of land parcel analysis are then applied to the Court Creek watershed in Knox County.  This watershed was broken into 300 foot by 300 foot parcels, and analyzed using data provided by the Department of Natural Resources, U.S. Geological Survey, and many other sources.  Ultimately, the authors found that there were 5,837 parcels near the 2,318 channels leading to a water body; 3,948 of these parcels were under crop production.  After determining the opportunity cost of land retirement as opposed to crop production, the authors found that achieving a 20% soil deposition abatement goal required an expenditure of $54.10 per ton of soil abated, for a total cost of $115,476.  Their model showed that the greatest benefit came from retiring highly sloped parcels with high soil erosion characteristics directly adjacent to a water channel.  Ignoring these parcel-specific variables, as the current plan does, increases total cost to $133,681.  This is because the current model only encourages farmers to retire land with low crop value, rather than those with large effects on soil erosion, and more parcels must be retired in order for the same goal to be met.  However, determining parcel-specific variables and administering this system is expected to result in a much higher transaction cost for implementation.

Major Contributions and Weaknesses

This paper effectively contributes to the stated goal of determining a more efficient method of sediment deposition abatement.  Given that the current system is a non-market-based flat rate payment for all land parcels, it makes sense economically that using a more market-based approach would yet higher net benefits.  The current model incentivizes retirement of land which has low value for crops.  If the value a farmer will receive by retiring their land is higher than the value they would receive by growing crops on that land, they will retire it.  This assumes a flat payment rate for any land in a given watershed.  By valuing each parcel individually, it is possible to determine which parcels provide the highest benefit by retiring.  These end up being those parcels that are very sloped, have a high rate of erosion, and are adjacent to a body of water.  Since the abatement goals are fixed, the most efficient way to reach the abatement goal is with the retirement of the fewest land parcels at the lowest total cost.  By taking into account the parcel-specific variables, we should expect to achieve a more efficient method of land parcel retirement.  However, this paper does not adequately explore the transaction costs associated with implementing this system.

Regarding transaction cost, there is a brief section that explains a generalized expectation for the increase in costs due to research and administration for a more complex system.  This does not sufficiently answer one question: is it cheaper to keep the current system in place, or will the complex system be more financially efficient?  This is a minor complaint compared to the overall article, which explores the topic at hand in depth and with a great understanding and use of economic principles.

(Header image credit Michael Oh)

An Economic Analysis of Cost-Effective Land Retirement by Steve Richey is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License.

This post was originally submitted for an Environmental and Natural Resource Economics class.