Tradeoffs Between Environmental Quality and Economic Returns from Agriculture: A Case Study of the Lower Little Bow Watershed, Alberta by Marcus Becker A thesis submitted in partial fulfillment of the requirements for the degree of Master of Science in Agricultural and Resource Economics Department of Resource Economics and Environmental Sociology University of Alberta © Marcus Becker, 2016 Abstract The aim of this study is to evaluate both the costs and benefits of implementing changes to agricultural practices, with the goal of identifying cost effective means of achieving environmental targets and providing supplementary information to policymakers. A suite of agricultural land use scenarios are developed to assess tradeoffs between economic returns from agriculture and indicators of environmental quality in the Lower Little Bow (LLB) watershed of southern Alberta. These scenarios, 11 in total, feature a range of beneficial management practices (BMPs) designed to improve select environmental criteria. Building upon research done previously on BMP adoption in the LLB watershed, the BMPs featured include alternative crop rotations, manure management strategies, and various land use conversions. The environmental factors of interest in this analysis are water quality and soil carbon levels, as represented by nutrient loads and changes to carbon sequestration rates, respectively. Results indicate that implementing BMPs in the LLB watershed to achieve environmental benefits will have negative impacts on economic performance and that policy changes may be necessary to induce land use changes. The results also demonstrate that certain land uses in the LLB watershed can achieve greater environmental benefits for less cost, which has important policy implications in an agricultural context. ii Acknowledgements First, I would like to thank my supervisor, Dr. Scott Jeffrey, for his insightful guidance, patience, and confidence in me throughout the duration of this project. He managed to see past our differences in hockey team preference and provide me with a constant source of encouragement throughout this endeavor, for which I am tremendously grateful. I would also like to thank Dr. Jim Miller, research scientist with Agriculture and Agri- Food Canada’s Lethbridge Research Station, for his support and helpful suggestions throughout the project. My thanks are also extended to Dr. Peter Boxall, member of my advisory committee, and Dr. David Chanasyk, external examining committee member, for their input and thoughtful comments. I also gratefully acknowledge the funding that was provided for this research project by Agriculture and Agri-Food Canada (AAFC) through the Watershed Evaluation of Beneficial Management Practices (WEBs) research program. Additionally, I am very appreciative of the support of the Department of Resource Economics and Environmental Sociology (REES), the Faculty of Agriculture, Life, and Environmental Sciences (ALES), and the University of the Alberta. To my friends, roommates, fellow students, and work colleagues: thank you. It’s been the best of times. Finally, to Mom and Dad. I am forever indebted to you both for your love and support throughout the entirety of my university education. Thank you. This could not have been possible without you. iii Table of Contents Abstract .......................................................................................................... ii Acknowledgements ...................................................................................... iii Chapter 1: Introduction ............................................................................... 1 1.1 Background ............................................................................................................. 1 1.2 Economic Problem .................................................................................................. 3 1.3 Research Objectives ................................................................................................ 4 1.4 Organization of the Thesis ..................................................................................... 4 Chapter 2: Agricultural Beneficial Management Practices and the Environment .................................................................................................. 6 2.1 Environmental Quality Outcomes of Interest ...................................................... 7 2.1.1 Water Quality and Nutrient Cycling .................................................................. 7 2.1.2 Storage of Soil Organic Carbon ......................................................................... 9 2.2 Beneficial Management Practices of Interest ..................................................... 10 2.2.1 Introduction of Alfalfa ..................................................................................... 10 2.2.2 Legume Green Manuring ................................................................................. 13 2.2.3 Introduction of Field Peas ................................................................................ 15 2.2.4 Manure Management ....................................................................................... 17 2.2.5 Conversion to Permanent Forage ..................................................................... 21 2.3 Chapter Summary ................................................................................................ 23 Chapter 3: The Study Area ........................................................................ 24 3.1 Agriculture in the County of Lethbridge ............................................................ 24 3.2 The Lower Little Bow Watershed ....................................................................... 28 3.2.1 Environmental Issues and Previous Research .................................................. 32 3.2.2 The Watershed Evaluation of Beneficial Management Practices (WEBs) Project ....................................................................................................................... 36 3.2.2.1 Producer Survey ........................................................................................ 39 3.2.2.2 Soil Testing ............................................................................................... 41 3.3 Chapter Summary ................................................................................................ 42 Chapter 4: Methodological Approach ...................................................... 43 4.1 Approaches to Modelling Agricultural Systems ................................................ 43 4.1.1 Mathematical Programming ............................................................................. 44 4.1.2 Simulation Analysis ......................................................................................... 45 4.1.3 Capital Budgeting and Net Present Value Analysis ........................................ 47 4.1.3.1 Capital Budgeting ..................................................................................... 47 4.1.3.2 Net Present Value Analysis ...................................................................... 48 4.1.3.3 Choosing a Discount Rate ......................................................................... 49 4.1.4 Nutrient Balance Budgeting ............................................................................. 50 4.1.5 Estimation of Changes to Soil Organic Carbon Storage .................................. 53 4.1.5.1 Literature Estimates and Modeling Approaches ....................................... 54 4.2 Chapter Summary and Introduction to Watershed Scenarios ......................... 56 Chapter 5: Study Methods ......................................................................... 58 iv 5.1. Classification of Fields in the Lower Little Bow Watershed ............................ 58 5.1.1. Land Uses of the Lower Little Bow Watershed .............................................. 59 5.1.2. Soil and Topographic Characteristics ............................................................. 60 5.2. Lower Little Bow Watershed Land Use Scenarios ........................................... 65 5.2.1 The Baseline Scenarios .................................................................................... 65 5.2.1.1 Baseline Crop Rotations ........................................................................... 66 5.2.1.2 Manure Application .................................................................................. 71 5.2.1.3 Crop Allocation Strategy .......................................................................... 71 5.2.1.4 Pastureland ................................................................................................ 72 5.2.2 Scenario 1: Introduction of Alfalfa .................................................................. 73 5.2.2.1 Scenario 1a ................................................................................................ 73 5.2.2.2 Scenario 1b................................................................................................ 75 5.2.2.3 Yield Benefits Following Alfalfa .............................................................. 75 5.2.2.4 Estimation of Nitrogen Fixation From Alfalfa ......................................... 77 5.2.2.5 Chemical Fertilizer Reduction Benefits .................................................... 83 5.2.2.6 Summary ................................................................................................... 85 5.2.3 Scenario 2: Introduction of Legume Green Manures, Field Peas, and Elimination of Summerfallow ................................................................................... 85 5.2.3.1 Scenario 2a ................................................................................................ 86 5.2.3.2 Scenario 2b................................................................................................ 89 5.2.3.3 Scenario 2c ................................................................................................ 90 5.2.3.4 Yield Benefits Following Legume Green Manuring and Field Peas ........ 90 5.2.3.6 Estimation of Nitrogen Fixation from Legume Green Manure Crops and Field Peas .............................................................................................................. 94 5.2.3.7 Chemical Fertilizer Reduction Benefits .................................................... 95 5.2.3.8 Summary ................................................................................................... 98 5.2.4 Scenario 3: Manure Management BMP ........................................................... 98 5.2.4.1 BMP Strategy ............................................................................................ 99 5.2.4.2 Manure Application Levels and Chemical Fertilizer Reductions ........... 102 5.2.4.3 Non-Nutrient Yield Benefits ................................................................... 109 5.2.4.4 Summary ................................................................................................. 112 5.2.5 Scenarios 4 and 5: Land Use Conversions ..................................................... 112 5.2.5.1 Scenario 4a .............................................................................................. 113 5.2.5.2 Scenario 4b.............................................................................................. 115 5.2.5.3 Scenario 4c .............................................................................................. 116 5.2.5.4 Scenario 5a .............................................................................................. 118 5.2.5.5 Scenario 5b.............................................................................................. 118 5.2.5.6 Scenario 5c .............................................................................................. 119 5.2.5.7 Nitrogen Fixation and Fertilizer Reduction ............................................ 119 5.2.6 Summary of Land Use Scenarios ................................................................... 121 5.3 Crop Yields .......................................................................................................... 121 5.3.1 Detrending Annual Crop Yield Data ............................................................. 121 5.3.2 Perennial Crop Yields .................................................................................... 123 5.4 Crop Prices .......................................................................................................... 125 5.5 Economic Relationships...................................................................................... 127 5.5.1 Cropping Revenue ......................................................................................... 127 v 5.5.2 Returns from Pasture ...................................................................................... 127 5.5.3 Input Costs ..................................................................................................... 129 5.5.4 Chemical Fertilizer Costs ............................................................................... 134 5.5.5 Manure Application Costs ............................................................................. 135 5.6 Biophysical Relationships ................................................................................... 136 5.6.1 Nutrient Inputs ............................................................................................... 137 5.6.1.1 Chemical Fertilizer Inputs ....................................................................... 137 5.6.1.2 Manure Inputs ......................................................................................... 141 5.6.1.3 Atmospheric Deposition ......................................................................... 142 5.6.2 Nutrient Outputs............................................................................................. 142 5.6.2.1 Harvested Crop Materials ....................................................................... 143 5.6.2.2 Animal Weight Gain ............................................................................... 145 5.6.3 Changes to Soil Organic Carbon Storage ...................................................... 146 5.7 Simulation of Scenario Outcomes...................................................................... 150 5.8 Chapter Summary .............................................................................................. 150 Chapter 6: Results and Discussion .......................................................... 151 6.1 Baseline Scenario Results ................................................................................... 151 6.2 BMP Scenario Results ........................................................................................ 156 6.2.1 Results for Scenario 1: Alfalfa ....................................................................... 156 6.2.2 Results for Scenario 2: Legume Green Manuring and Field Peas ................. 164 6.2.3 Results for Scenario 3: Manure Management ................................................ 171 6.2.4 Results for Scenario 4: Permanent Forage ..................................................... 179 6.2.5 Results for Scenario 5: Cultivation of Pastureland ........................................ 189 6.3 Summary Comparisons ...................................................................................... 199 6.3.1 Economic Outcomes ...................................................................................... 199 6.3.2 Nutrient Balance Outcomes ........................................................................... 202 6.3.2.1 Nitrogen .................................................................................................. 202 6.3.2.2 Phosphorus .............................................................................................. 204 6.3.3 Soil Organic Carbon Storage Outcomes ........................................................ 206 6.4 Tradeoff Curves .................................................................................................. 208 6.5 Public Benefit Valuation..................................................................................... 216 6.5.1 Climate Change Mitigation Service ............................................................... 216 6.5.2 Value of Water Quality Improvements .......................................................... 219 6.5.3 Incorporation of Public Benefits in BMP Scenario Evaluation ..................... 223 6.6 Sensitivity Analysis ............................................................................................. 225 6.7 Chapter Summary .............................................................................................. 226 Chapter 7: Synthesis and Conclusions .................................................... 227 7.1 Summary of Results ............................................................................................ 227 7.1.1 Private Impacts of Beneficial Management Practice Adoption ..................... 229 7.1.2 Public Impacts of Beneficial Management Practice Adoption ...................... 232 7.2 Implications for Agricultural Production and Policy in the Lower Little Bow Watershed .................................................................................................................. 235 7.3 Study Limitations ................................................................................................ 236 7.4 Further Research ................................................................................................ 238 References .................................................................................................. 239 vi Appendix A: Field Land Use Designations and Biophysical Characteristics........................................................................................... 259 Appendix B: Crop Rotations and Field Allocation Strategy ................ 263 B.1. Baseline Scenarios and Scenario 3 ................................................................... 263 B.2. Scenarios 5a and 5c ........................................................................................... 267 B.2. Scenarios 1a, 1b, and 5b ................................................................................... 268 B.3. Scenarios 2a, 2b, 2c ........................................................................................... 272 Appendix C: Yield Trend Regression Results ....................................... 277 Appendix D: Detailed Scenario Results .................................................. 278 Appendix E: Results of Sensitivity Analysis ........................................... 292 E.1. Fertilizer Price Sensitivity Results ................................................................... 292 E.2. Crop Price Sensitivity Results .......................................................................... 297 E.3. Crop Yield Sensitivity Results .......................................................................... 299 vii List of Tables Table 3.1 – The Distribution of Farm Size in the County of Lethbridge, 2001 .................25 Table 3.2 – Crop Production in the County of Lethbridge, 2011 ......................................26 Table 3.3 – Distribution of Farm Total Gross Receipts in the County of Lethbridge in 2011....................................................................................................................................27 Table 3.4 – 2006 Land Use and Crop Acreage in the Lower Little Bow Watershed ........40 Table 3.5 – Distribution of Soil Test N Level Across 65 Fields in the Lower Little Bow Watershed in 2006 .............................................................................................................42 Table 3.6 – Distribution of Soil Test P Level Across 65 Fields in the Lower Little Bow Watershed in 2006 .............................................................................................................42 Table 4.1 ‐ List of Watershed Scenarios and Corresponding BMPs for Evaluation…….57 Table 5.1 – Land Use Categories and Corresponding Acreage of the Lower Little Bow Watershed .........................................................................................................................60 Table 5.2 – Soil Texture Category Based on Textural Class .............................................63 Table 5.3 – Percentage Increase in Yield to Crops Following Alfalfa Hay on Irrigated Fields or Alfalfa/Grass Mix on Dryland Fields .................................................................77 Table 5.4 – Ranges for Percentage of Harvested Plant Nitrogen Derived From Biological Fixation in Alfalfa, By Year of Stand and Sum of Residual Nitrogen in the Soil .............82 Table 5.5 – Percentage Increase in Yield to Crops Following Fababean Green Manure, Red Clover Green Manure, and Field Peas, By Crop Rotation .........................................93 Table 5.6 – Nitrogen Fertilizer Reduction Benefits to Crops Following Fababean Green Manure, By Year Following Plowdown and Number of Times in Rotation. ...................97 Table 5.7 - Nitrogen Fertilizer Reduction Benefits to Crops Following Red Clover Green Manure, By Year Following Plowdown and Number of Times in Rotation. ...................98 Table 5.8 - Typical Nutrient Content of Cattle and Swine Manure, Wet Basis .............103 Table 5.9 - Mineralizing Rate of Organic N and P in Cattle Manure ..............................104 Table 5.10 - Average Manure Ammonium Nitrogen (NH -N) Retention Factors Based on 4 Expected Volatilization Losses .......................................................................................105 Table 5.11 - Phosphorus Availability From Manure Application on Dryland and Irrigated Fields, Scenario 3 .............................................................................................................110 Table 5.12 - Nitrogen Availability From Manure Application on Dryland and Irrigated Fields, Scenario 3 .............................................................................................................111 Table 5.13 - Forage Stand Progression on Dryland Fields, Scenario 4 ...........................114 Table 5.14 - Land Use Categories and Corresponding Acreage, Lower Little Bow Watershed, Scenario 4 .....................................................................................................117 viii Table 5.15 - Ranges for Percentage of Harvested Plant Nitrogen Derived From Biological Atmospheric Fixation in Alfalfa, By Year of Stand and Sum of Residual Nitrogen in the Soil, Scenario 4 ................................................................................................................120 Table 5.16 - Summary of Detrended Historical Crop Yields in Lethbridge County, Alberta, 1978-2013 (kg acre-1) .........................................................................................122 Table 5.17 - Yield Variation Over Time for Dryland Alfalfa/Grass Mix, Irrigated Alfalfa Hay, and Irrigated Timothy Hay Stands (kg acre-1) .........................................................124 Table 5.18 - Summary of Historical Crop Price Data (2014 Canadian Dollars) ($ tonne-1). ..........................................................................................................................................127 Table 5.19 - Input Costs By Pasture Type, Southern Alberta Region ($ acre -1) ............131 Table 5.20 - Input Costs By Crop, Dark Brown Soil Region of Alberta, Dryland Production ($ acre-1) ........................................................................................................132 Table 5.21 - Input Costs By Crop, Irrigated Production in Alberta ($ acre-1) .................133 Table 5.22 - Baseline Nitrogen Chemical Fertilizer Inputs By Crop, Dryland and Irrigated Production (kg N acre-1) ...................................................................................................140 Table 5.23 - Baseline Phosphorus Chemical Fertilizer Inputs By Crop, Dryland and Irrigated Production (kg P acre -1). ..................................................................................141 Table 5.24 - Average Nutrient Removal Rates in Harvested Crop Material (kg kg-1) ...145 Table 5.25 - Parameter Values Used to Calculate Change in Soil Organic Carbon Storage, Semiarid Prairie Reporting Zone ....................................................................................150 Table 6.1 - Summary Economic and Biophysical Results, Baseline and BAU Baseline Scenarios .........................................................................................................................153 Table 6.2 - Field Level Average Annual Nitrogen and Phosphorus Balances in the BAU Baseline Scenario, By Crop Rotation, Soil Texture, and Nutrient Source (kg acre-1) ....156 Table 6.3 - Summary Economic and Biophysical Results, Baseline and Scenarios 1a and 1b .....................................................................................................................................157 Table 6.4 - Field Level Average Annual Nitrogen and Phosphorus Balances on Cropped Fields in Scenarios 1a and 1b, By Crop Rotation and Soil Texture (kg acre-1) ..............160 Table 6.5 - Summary Economic and Biophysical Results, Baseline and Scenarios 2a, 2b, and 2c. ............................................................................................................................166 Table 6.6 - Field Level Average Annual Nitrogen Balance on Cropped Fields in Scenarios 2a, 2b, and 2c, By Crop Rotation and Soil Texture (kg acre-1) ......................169 Table 6.7 - Field Level Average Annual Phosphorus Balance on Cropped Fields in Scenarios 2a, 2b, and 2c, By Crop Rotation and Soil Texture (kg acre-1) ......................170 Table 6.8 - Summary Economic Results, Baseline and Scenario 3 ................................173 Table 6.9 - Summary Biophysical Results, BAU Baseline, Baseline, and Scenario 3 ...174 ix Table 6.10 - Field Level Average Annual Nitrogen Balance on Cropped Fields a in the BAU Baseline and Scenario 3, By Crop Rotation, Soil Texture, and Nutrient Source (kg acre-1) ...............................................................................................................................176 Table 6.11 - Field Level Average Annual Phosphorus Balance on Cropped Fields a in the BAU Baseline and Scenario 3, By Crop Rotation, Soil Texture, and Nutrient Source (kg acre-1) ...............................................................................................................................178 Table 6.12 - Summary Economic and Biophysical Results, Baseline and Scenarios 4a, 4b, and 4c ..............................................................................................................................181 Table 6.13 - Field Level Average Annual Nitrogen Balance on Cropped Fields in Scenarios 4a, 4b, 4c, and the Baseline, By Crop Rotation and Soil Texture (kg acre-1) .186 Table 6.14 - Field Level Average Annual Phosphorus Balance on Cropped Fields in Scenarios 4a, 4b, 4c, and the Baseline, By Crop Rotation and Soil Texture (kg acre-1) 186 Table 6.15 - Net Changes in Soil Organic Carbon From Various Land Use Changes in Scenarios 4a, 4b, and 4c (Tonnes C) ...............................................................................189 Table 6.16 - Summary Economic and Biophysical Results, Baseline and Scenarios 5a and 5b .....................................................................................................................................191 Table 6.17 - Summary Economic and Biophysical Results, BAU Baseline and Scenario 5c ....................................................................................................................................193 Table 6.18 - Field Level Average Annual Nitrogen and Phosphorus Balance on Cropped Fields in Scenarios 5a and 5b, By Crop Rotation and Soil Texture (kg acre-1) ..............196 Table 6.19 - Net Changes in Soil Organic Carbon From Various Land Use Changes in Scenarios 5a and 5b (Tonnes C) .....................................................................................197 Table 6.20 - Percent Change in Producer Returns, BMP Scenarios Relative to the Baseline Scenario ...........................................................................................................201 Table 6.21 - Percent Change in Nitrogen Balance, BMP Scenarios Relative to the Baseline or BAU Baseline Scenarios ..............................................................................204 Table 6.22 - Percent Change in Phosphorus Balance, BMP Scenarios Relative to Baseline or BAU Baseline Scenarios ............................................................................................206 Table 6.23 - Net Change in Soil Organic Carbon Storage in BMP Scenarios, Relative to the Baseline (Tonnes C) ..................................................................................................208 Table 6.24 - Colour of Scenario Points in Figures of Tradeoff Curves ……...……….. 209 Table 6.25 - Average Producer Returns and Nutrient Balance on Cropped Fields in 11 BMP Scenarios and the Baseline Scenario ......................................................................213 Table 6.26 - Net Present Value of Climate Change Mitigation Services Provided By Increased Soil Organic Carbon Storage of BMP Scenarios Under Four Social Cost of Carbon Estimates (thousand $) .......................................................................................218 Table 6.27 - Net Present Value of Water Quality Benefits From Changes to Residual Nitrogen and Phosphorus Levels in BMP Scenarios .......................................................222 x