RRRD039: Cost-effectiveness of management activities for water quality improvement in sugarcane farming

Martijn van Grieken¹, Mark Poggio², Marcus Smith², Bruce Taylor¹, Peter Thorburn¹, Jody Biggs¹, Stuart Whitten¹, Claire Faure³ and Alexis Boullier⁴

¹ CSIRO Ecosystem Sciences

² Queensland Department of Agriculture, Fisheries and Forestry

³ ENSAIA France

⁴AgroParis Tech France

Download the RRRD039 van Grieken et al Research Outcomes Report2.68 MB

Executive Summary

There is now an extensive amount of literature documenting, in increasing detail and confidence, the sources and potential implications for pollutants entering the Great Barrier Reef (GBR) lagoon. Land uses that contribute to this are dominated by diffuse source agricultural pollutants, with the primary source differing by industry: sediments are primarily generated by grazing activities whilst nutrients are largely attributed to cropping activities, which is dominated by sugarcane production. Agricultural chemicals are exported by both industries although the type of chemicals (active ingredient) differs. Reducing the level of pollutant exports will require the widespread adoption of improved management practices and continued research and development into innovative solutions to minimise diffuse-source agricultural pollutants. The focus in this Reef Rescue Research and Development project “Integrated assessment of BMP cost-effectiveness and decision tool for regions and landholders” is to evaluate the financial-economic and water quality implications of changing management practices, including their cost-effectiveness, as well as the barriers and opportunities offered by a variety of practice changes.

Estimates of the relative cost and effectiveness of improved practices are becoming available for various practices and locations. Within the cane industry, results from recent economic research suggest that some practices are likely to increase the returns to landholders once adopted. However, adoption of these practices varies considerably; there has been strong adoption among some groups of farmers and in some locations, but relatively little in others. We hypothesise that this may be the case because previous approaches do not adequately represent the diversity of farm enterprises across land types, operating structures, or transition costs. Furthermore, gains may not be sufficiently large to either motivate change or to be identified by landholders amongst other sources of production variability and risk. Therefore, the generalised results of previous studies may not apply universally, and instead some groups of landholders may experience greater than expected gains from adoption, while adoption may impose costs on others. Such differences may be driven by an elaborate combination of biophysical and enterprise variables. Biophysical variables are likely to include soil type, rainfall and other weather variables. Enterprise variables are likely to include structural factors involving farm size and operating strategy, capital and labour constraints, and the farmers’ operating objectives.

The component reported in this report is part of the broader RRRD039 project. The focus of this particular report is to analyse socio-economic, institutional and financial-economic datasets to:

• Provide context regarding landholders’ perceptions of, and experiences with, processes of change in their farming operation and their experience with participating in government programs such as the Reef Rescue;
• Extend cost-effectiveness estimates to include three NRM regions growing sugarcane, major land types, enterprise variations, and a range of management activities - this work consequently extends the work carried out in existing projects;
• Identify real and perceived limiting factors regarding specific management practices and/ or relative advantages in adopting these practices, such as the requirement for capital, the complexity of the practice, or how the practice may impact on profitability; and
• Provide financial-economic inputs to an integrative regional model.

Key findings
The social-institutional analysis conducted as part of this project identified several aspects that were influential in the decisions made by growers to participate in the incentive-based Reef Rescue program, as well as revealing insights into the experience of growers who participated. These aspects broadly include:

• The availability of government funds and explicit environmental goals of the funding agency appeared to result in limited involvement by farmers in the early years of the program-roll out, but was less influential in latter rounds as trust improved;
• Importance of local trusted advisors in providing the information and practical support needed to apply for the funds in a decentralised implementation of the program; and
• Influence (often constraining) of existing local economic relationships between growers and their contractors and harvesting groups, which is not taken into account in program design. This makes it difficult for landholders to change harvest or other group practices independently of the ‘group’.

The financial-economic analysis highlighted a few key messages to support the notion that accounting for biophysical and enterprise-structural variability (heterogeneity) in natural resource management (NRM) is likely to be cost-effective:

• There appears to be significant variation in farm gross margins between regions and (to a lesser extent) across farm sizes. This indicates that a single representative farm model is likely to misrepresent the actual financial-economic consequences of changing management;
• Variation in farm gross margins within regions is relatively modest for the practices evaluated, particularly with the relative economic benefit as a proportion of the average farm gross margin. This tends to highlight the importance of factors such as transaction costs, risk, and other relative (dis-)advantages associated with practice change;
• The above point also highlights the fact that the direct financial consequences associated with changed practices are potentially difficult to distinguish from other factors impacting on variability in business performance (e.g. price volatility and productivity influences);
• Economies of scale are evident (between small, medium and large farms, operational efficiencies are higher for larger farms where greater asset utilisation is possible);
• Changed practices that achieve environmental and economic benefits were identified but trade-offs also exist and may require different policy approaches; and
• For the combinations of practices analysed in this research, a more targeted nutrient management strategy may prove to have the best cost-effectiveness in improving water quality.The extent to which this affects both financial and environmental outcomes varies between regions, soil types and farm sizes and current management systems. The results indicate that moving beyond the existing commercially tested nutrient management is likely to come at a cost to the farmer.

More specific management practice related messages generated from these studies include:

• Six-Easy-Steps nutrient management regime resulted in the highest farm gross margins across all comparative scenarios;
• Farm gross margins tended to be relatively higher for low tillage scenarios, and relatively lower for legume fallows in the absence of yield improvement;
• Changing from old industry recommended rates to Six-Easy-Steps provides both financial and overall water quality benefits (total DIN reduction);
• Changing from Old Industry recommended rates to N-Replacement nutrient management rates provides a water quality benefit. This change also provides a financial benefit in a legume fallow system, however comes at a cost in a bare fallow system;
• Changing from Six-Easy-Steps to N-Replacement nutrient management provides substantial water quality improvement in the Wet Tropics and Mackay Whitsunday regions, and with limited cases in the Burdekin, while also generally resulting in a financial cost to the farmer;
• In the absence of yield improvement, results indicate that moving from a bare fallow to a legume fallow cover crop will generally result in a financial cost to the farmer (especially for small farms due to the required capital expenditures), and will only improve DIN in limited cases (dependant on nutrient and tillage management); and
• Moving from high tillage to low tillage will generally provide financial benefits, where water quality benefits are variable and regionally specific.

There are some significant areas of convergence between the social-institutional and financial-economic analyses above.

• First, the relatively modest variation in FGMs within regions highlights the need to consider any specific transaction costs and risk associated with each practice change. This emphasises the importance of engagement with growers through extension networks, which help to promote grower participation in practice change programs.
• Second, it is generally more efficient for larger operators to implement changes, which is often exacerbated by the dependence of small-medium size operators on collective harvesting and contracting relationships. Accordingly, individual-level and aggregate risks associated with change may not be shared by larger operators due to the existence of economies of scale identified in the financial analysis.

Benefits and application of the findings
There are ample opportunities within the sugarcane producing industry to reduce pollutant exports to the Great Barrier Reef (GBR) lagoon. These opportunities include, but are not limited to, implementing management practices such as modifying nutrient application rates and methods, reducing tillage, and trapping sediment. However, implementing a process of management change across the farming system often requires substantial capital investment combined with the uptake of additional operational expertise and time spent managing the process itself. Hence, the main objective of the research in this component of the RRRD039 project is to evaluate the financial-economic implications for landholders when changing their management practices to those that have the potential to reduce the loss of sediment and nutrients to the GBR lagoon. This research builds on previous economic work undertaken using single representative farms by taking into account the unique aspects of each region, such as the heterogeneity (variability) in soil types, climatic zones, and farm sizes.

The information generated from this research is relevant to the interests of numerous stakeholders, including:

• Landholders who are considering implementing changed practices and thus seeking to understand the potential financial-economic and environmental consequences associated with that change;
• Extension officers who aim to focus attention upon win-win practice changes;
• NRM regional bodies considering potential mechanisms to support (win-win, as well as) win-lose options;
• Policy makers who seek to understand the potential, direct private financial consequences of targeting improvement in water quality; and
• Researchers who seek to understand the trade-offs associated with practice change with a view to developing new technologies with potential for win-win outcomes.

Future directions
A number of potential avenues for future research are created by this work. First, while only a limited number of nutrient management practices have been subject to investigation, others may exist with the potential to achieve greater improvements in water quality. It will be interesting to determine the on-ground implications of any new technologies including profitability and water quality outcomes. Second, further research could be undertaken using a different approach, whereby actual nutrient efficiency targets are developed to determine the required practice change to achieve a desired level of water quality. Moreover, what are the economic implications of achieving these targets via any particular strategy? Here an understanding of the relative costs and benefits, in social and institutional terms as well as financial and economic terms, of different delivery strategies (e.g. individualised, group-based, industry-based) could be ascertained to improve program implementation in different regional contexts. Third, the impact of a change in industry structure (size of farms, location and number of farms) on water quality could be investigated. Finally, given the level of heterogeneity between and within regions, spatial targeting is likely to lead to the most cost-efficient way of improving water quality while maintaining a healthy industry. Accordingly, the information presented through this research can be further used to evaluate and monitor cost-effective policy instruments, institutional settings, delivery mechanisms, and ways of targeting local community support to achieve desirable water quality levels emanating from a heterogeneous industry and landscape.