Natural Resource Economics
Department of Agricultural, Environmental, and Development Economics
Landowner cooperation and conservation practices are necessary to control nonpoint source pollution. Cost-share programs encourage adoption of conservation programs by reducing the cost of implementation. The decision to adopt a new practice depends upon many factors, however, including changes in farm costs, revenues, and the financial incentive. Before producers decide to adopt a conservation practice they must carefully assess impacts on farm profitability. The value of the cost-share payment can then be compared to farm profitability to determine the economic feasibility of a program.
This fact sheet examines how a cost-share program to adopt conservation tillage will impact the per unit cost of owning and operating equipment. The worksheet on page 3 compares the cost of owning specialized equipment with and without a cost-share program. Here an example is shown for the purchase of a 30 ft. no-till drill and a $3,000 cost-share program payment. For a list of nonpoint source cost-share programs available in Ohio refer to Ohio State University Extension Fact Sheet AE-01-97 titled Incentive Programs for Improving Environmental Quality. Additional "Best Managed Practice" information can be found via the Internet at the following address: http://www-agecon.ag.ohio-state.edu/faculty/bsohngen/bmp/bmpinfo.html
Cost-share programs financially support implementation of specific conservation practices. For producers, one benefit of participation is the value of the cost-share payment. However, there may be other benefits from adoption of conservation practices. A reduction in soil loss may improve soil quality and increase productivity over time, and improve the quality of water for those downstream. With less soil leaving the land, municipalities spend less money removing excess sediments from drinking water and drainage ditches. Wildlife habitat and recreational activities may also benefit from reduced levels of sedimentation. For more information on conservation practices to reduce soil loss refer to three Ohio State University Extension publications, Agriculture Best Management Practices (AEX 464), Best Management Practices for Preventing Contamination of Ohio Ground and Surface Waters (Bulletin 818), and Crop Production Alternatives (Bulletin 812).
The cost of implementing conservation practices varies from relatively inexpensive to very expensive. For some conservation practices the cost of purchasing equipment can be more than offset by reduced production costs. For practices such as filter strips, riparian zones, and wetlands, crop land is taken out of production and the cost of implementation may be relatively more expensive. This fact sheet looks at the cost of owning and operating specialized equipment with and without a cost-share program. By providing a first cut assessment of these costs, producers are better able to decide if further investigation of the program or practice is economically feasible.
The worksheet on page 3 compares the cost of carrying out conservation tillage with an available cost-share payment. First, the costs of owning equipment necessary to implement the conservation practice are estimated. Then the program payment is compared to these costs. This first cut assessment is designed only to compare the reduction in ownership costs for a specific conservation program. It is not designed to estimate farm profitability from adoption or implementation of the specific practice. Many other factors must be considered before making the decision to purchase equipment. This worksheet provides a means of estimating how much the cost-share program reduces the costs of owning the equipment necessary to implement the conservation practice.
The worksheet is arranged in five sections and each section is described in detail using a no-till example. The example shown is for a cost-share program which provides a maximum payment of $3,000. Adopting conservation tillage requires the purchase of a no-till drill which is estimated to cost $20,000. For each worksheet line item a value is provided for the no-till example. A blank worksheet is provided on page 4.
Section 1.0 describes the implement under consideration. A separate worksheet can be completed if more than one implement is needed. Here the no-till drill is 30 ft. wide, has a field speed of 5 mph, and operates at a 75% rate of efficiency. In this case a 30 ft. no-till drill can cover about 14 acres per hour of operation. The area covered per hour of operation is found by multiplying [30 ft. (width in feet) x 5 mph (operating speed) x 0.75 (operating efficiency as a decimal) / 8.25 (43,560 ft2/acre / 5,280 ft/mi)]. Operating efficiency rates may vary by implement (field operation), field size and shape, but generally range between 65% and 85% with an average of 75%.
To calculate the per unit operating costs, it is necessary to estimate the number of total acres the implement will be used each year. With total acres and area covered per hour known, an estimate of total hours used each year can be determined (line 2.1 / line 1.4). Enter the expected number of years the implement will be in service on line 2.3. To calculate the total number of acres this implement is expected to be used over its useful life multiply line 2.3 by line 2.1.
Fixed costs are those costs which are incurred regardless of use. These annual fixed costs are depreciation, interest, insurance, and housing. In this example, annual fixed costs are calculated as a percentage of the list price based upon the complement of machinery for an average farm. These fixed cost factors, as a percentage of list price, vary by individual operation, but generally range from 15% to 20%.
Operating costs or variable costs differ from fixed costs in that they vary with usage. Machine repair is a typical example of a variable cost. As the number of acres covered increase, these costs increase as well. Again, a single factor is used to estimate the annual operating cost of a piece of equipment. As expected, these factors will vary depending on the type of equipment, but generally range between 2% and 7% annually. Using factors such as these provides only an estimate of what the actual ownership and operating costs may be. In addition, other variable costs must be considered to identify total operating costs. Labor, fuel, and oil expenses are not included in this estimate of operating costs since these costs are generally associated with operation of tractors.
Using the list price for the no-till drill, estimates of the annual ownership and operating costs for the drill can be obtained. Dividing the annual ownership cost by the estimated usage provides the per hour cost of ownership. In this example, the annual ownership cost is $3,400 ($20,000 x 17%) and the per hour cost of ownership is $77.27 ($3,400 / 44 hrs.). Dividing the annual operating cost of $800 ($20,000 x 4%) by the hours of usage calculates the per hour operating cost of $18.18 (800 / 44 hrs). The total hourly cost of owning and operating this piece of equipment is found by adding these two rates together ($77.27 + $18.18 = $95.45). Dividing the total per hour cost by the acres covered per hour gives a per acre cost of $7.00 ($95.45 / 13.64 acre/hour).
These cost estimates are now compared with the cost-share program payment(s). Here the cost-share program is assumed to be a single payment. Programs covering multiple years and having multiple payments must be converted to a single payment. This one-time payment is calculated by adding all cost-share payments. The total cost-share payment amount is entered on line 5.1. Determining the value of the program payment over the useful life of the implement is found by dividing the program payment of $3,000 by the total acres the implement will cover during its useful life [$3,000 / 6,000 (600 ac/yr x 10 years)], or $0.50 per acre. In other words, a $3,000 conservation program payment for the purchase of a $20,000 no-till drill covering 600 acres per year for 10 years reduces annual ownership and operating costs by $0.50 per acre. Therefore the per acre cost of owning and operating this implement is $6.50 per acre with the cost share program or $7.00 per acre without the program.
Cost-share programs encourage the adoption of conservation practices by reducing the costs of adoption. Generally, cost-share payments are expected to partially offset the cost of purchasing specialized equipment such as no-till/conservation tillage, manure injection or application equipment, and other specialized equipment. This worksheet is designed to compare program payments with ownership and operating costs over the life of the implement and provides a better comparison of the economic value of the program for the producer.
All educational programs conducted by Ohio State University Extension are available to clientele on a nondiscriminatory basis without regard to race, color, creed, religion, sexual orientation, national origin, gender, age, disability or Vietnam-era veteran status.
Keith L. Smith, Associate Vice President for Ag. Adm. and Director, OSU Extension.
TDD No. 800-589-8292 (Ohio only) or 614-292-1868