Betting the farm on it – how rural land use (may) change with recent commodity prices and land sales

By Zack Dorner

Farming is a risky business, as is forestry. You are at the whim of the weather and international commodity prices which, as we have been reminded by recent dairy prices, can drop rapidly without much warning. Meanwhile, farmers have to make long term decisions about capital investments, or decide whether to convert from one type of a farm to another. Foresters must plant trees which won’t pay off for several decades. Given the importance of rural land use for New Zealand’s economy and environment, it is important that we understand better how land use changes in response to economic drivers.

For my honours thesis last year I decided to look into recent rural land use changes in New Zealand and whether changes may be associated with recent commodity prices and land sales. I’m very happy that my thesis has now taken the form of a Motu Working paper, which has just been released. In lieu of you having to read the full paper (though of course I encourage you to do so!), here is a quick summary of some things I learnt along the way.

Looking forward: what NZ rural land might look like in the coming decades under a carbon price

This blog post is by Motu Research Analyst Zack Dorner.

A couple of years ago, my sister brought her partner to visit New Zealand for the first time. We picked them up in Auckland, and drove down the North Island back to Wellington. He asked “Why are there so many golf courses here?”

Of course, they weren’t golf courses, but the lush, green grassy farmland that New Zealand is so well known for, and that he was not used to.

Motu has just released a new working paper, modelling what our rural land might look like in the coming decades, including with a price on agricultural GHGs (greenhouse gases). Luckily, for our “golf courses”, even with the agricultural sector facing a price on its GHGs, New Zealand probably won’t look much different to the way it does now.

The really cool thing about the model used is that it is based on real world observations of how rural land use in New Zealand has changed in recent decades in response to commodity prices. It is slow to adjust – farmers don’t want to switch immediately to the new best thing for their land (see final graph below), which is understandable. Changing your whole farm can’t be easy or cheap to do, and who’s to say market conditions won’t change again.

Of course, the results in the working paper are just from a model. They do not predict the future, but give us an idea about the types of changes to land use and their magnitude under certain scenarios. There are on-farm mitigation options that farmers may be able to do to reduce their GHGs before changing land use, but to keep things simple, the model does not include these.

The working paper models three scenarios out to 2030: no carbon price, a carbon price ($25) just for forestry, and a greenhouse gas price for forestry and agricultural emissions.

The model shows several interesting things.

First, as I have said, land use change is quite slow. Even with a $25 carbon price on forestry and agriculture, there is actually relatively minimal changes in land use. This provides evidence that our agricultural sector may be able to respond efficiently to a price on carbon without huge disruption to rural life in New Zealand.

However, although changes to land use are gradual and small, they actually make a big difference to our emissions. The extra trees are especially helpful in this regard. From the paper directly:

Under our ETS [emissions trading scheme] scenarios there is substantial reforestation. The extra removals associated with this new planting mean that the additional sequestration in 2024 is from 17.6 to 20 percent of national inventory agricultural emissions in 2008.

That’s a huge amount of emissions, and would help New Zealand immensely in our quest to lower our emissions.

In terms of cows and sheep, we actually see more dairy cows, and fewer sheep and beef farms. This is because dairy farms are so much more profitable, and the balance is tipped even more in their favour once a price is applied to farming emissions. This is already happening to a much larger extent, and only the already marginal sheep and beef farms are converted to dairy or forestry under an efficient response to a carbon price. The overall change is only minor in the scheme of things, and even when you exclude agricultural emissions from a carbon price, this still happens (see the first graph below).

So these results suggest that there are large benefits to having a $25 carbon price in New Zealand for forestry and our country’s emissions profile. As for agricultural emissions, if dairy and sheep and beef farmers face a price on their emissions, the sky won’t fall in, but the adjustments that are already taking place will just continue to a greater extent. By creating an efficient, economy-wide price signal which includes agriculture, we should achieve more mitigation overall (see the second graph below). If on farm mitigation is encouraged optimally, and technologies continue to improve, we might well see less of the minor reduction in farming in the model and instead end up with more efficient farms on our rural land.

Bringing agricultural emissions into the ETS or some other pricing mechanism must occur once farmers are ready and on board. Through research like this, and having a dialogue with all interested parties, we can hopefully move forward together, and work towards future-proofing our golf courses, and our farms.

And now, for those of you who get a kick out of graphs (like me), here are some relevant ones:

This graph above shows the projected change in land use share for each type of land use. The solid lines give baseline projections. Short-dash-dot lines give a $25 carbon price, but not on agriculture. Dashed lines show a carbon price with agriculture. Note the y axis is the same scale for each graph so direct comparisons can be made (page 9).

This graph shows the amount of emissions that are reduced or sequestered. The red line is with just forestry, the blue line shows including agricultural emissions as well increases the emission reductions (page 16).

  

This final graph below shows why sheep and beef farms have been declining over the years, and how land use change is gradual (page 4 of Kerr and Olssen 2012).

Biological Farming and soil carbon – green wash or climate saviour?

This blog post is by Motu Research Analyst Zack Dorner.

Earlier this year, AgDialogue participant Rick Braddock sent us through this article, written Clayton Wallwork from the Carbon Farming Group, about Biological Farming. Rick Braddock is Operations Director of Farming New Zealand, an agricultural investment fund established to aggregate large pastoral farms under a New Zealand ownership model, as well as a trustee of the Carbon Farming Group.

Biological Farming is a farming practice that is still being developed and aims to use natural rather than synthetic fertilisers. We at Motu decided to ask some soil scientists about the potential for Biological Farming to store soil carbon, as a way of removing carbon dioxide from the atmosphere.

As noted in the Carbon Farming Group article, evidence to date around Biological Farming is largely anecdotal, and each farm has different Biological Farming techniques applied to it, based on its unique circumstances.

Troy Baisden from GNS Science told us about what may cause changes in soil carbon in traditional intensive farming system, and how this might differ under a Biological Farming system. Biological Farming systems may be less prone to losing soil carbon compared with traditional intensive systems, but Troy emphasises there is no clear evidence Biological Farming will gain soil carbon. Therefore more research is needed before it can claim to be a reliable way of helping to address climate change.

Troy explained to us that it is almost impossible to store carbon in soil without nitrogen, typically at a ratio of around ten carbon particles to one nitrogen particle. Therefore, understanding the amount of nitrogen being stored in the soil is important for understanding how much carbon is stored in the soil (see image below).

This image was pulled from this useful article in NZ Science Teacher magazine

With intensive farming, by trying to push more nitrogen through the system (by using more nitrogen fertiliser or importing more feed to produce more product), farm nitrogen budgets show that despite increasing nitrogen inputs, many farms lose more nitrogen than they gain. Counter intuitively, it seems that cycling more nitrogen faster and faster through the soil might eventually start to cause the overall level of nitrogen and carbon in the soil to drop. 

Troy says “We’ve been surprised at the level of losses that seem to be occurring, and at the observation that large N [nitrogen] losses seem to be taking carbon out of the soil as well.” Unfortunately it remains difficult to understand why these losses are occurring and work out the exact numbers without long-term experiments that run for decades. The one long term study to date provides some evidence that almost three quarters of a tonne of carbon per hectare per year are lost on traditional intensive dairy farms (Schipper et al. 2010).

In terms of Biological Farming, Troy says:

...the main argument [is] that you’re trying to work with a system that regulates itself better. So it will simply tell you “no” when you try and push it too hard. ... That’s the magic of it. ... One of the reasons why you can’t [push the system] is you’re not going to add bag nitrogen fertiliser.

By relying on natural nitrogen fixation, such as through clover in the soil, the soil is prevented from becoming saturated with nitrogen to the point where it loses more than it is gaining, and the total level of nitrogen in the soil starts to drop. The natural nitrogen fixers shut down when the system is being run too hard, though of course this will also place a limit on the total output of the farm. Though this might mean a Biological Farming system isn’t losing soil carbon, it’s unclear whether Biological Farms actually gain soil carbon.

There is very limited evidence that organic farming systems (which are similar to Biological Farming systems) limit nitrogen losses much better than a conventional farming system, but we still don’t understand fully why that might be (and Troy is not aware of this evidence having been published).

So, Biological Farming could be better at managing stores of carbon if it is better at managing stores of nitrogen. But the jury is still out.

Jacqueline Rowarth, Professor of Agribusiness at Waikato University who holds a PhD in soil science, is even less positive about Biological Farming. It’s a very complicated picture, as carbon has many ways into and out of the soil within a farm system. For example, Jacqueline points out that drought could be the major cause of loss in soil carbon in the Schipper et al. (2010) study, given the study’s period and the effects of drought during that time.

There are a number of ways in which carbon will find its way onto and off of a farm. Like any plant, the grass will naturally remove carbon from the atmosphere and use it to form its structure as it grows, including its roots in the soil. On a dairy farm carbon is regularly being exported in milk tankers, having been removed from the soil and grass through grazing, and turned into part of the milk by livestock, rather than being put directly into the atmosphere (this also applies to nitrogen). Less carbon will be exported less regularly from a sheep and beef farm, through removal and slaughter of animals.

Carbon is also being added through any inputs brought into the farm, including extra feed such as palm kernel (though of course this may have climate impacts elsewhere). Fertilisers such as urea will only add nitrogen directly to the soil, and not carbon.

Another dimension within a farming system is level of grazing. The growth of grass on soil can have a bearing on the amount of carbon in the soil. More grass on the surface supports more litter in the soil, which increases soil carbon. Also, different types of grasses will support different levels of carbon being stored in the plants and soil.

With lower levels of production from Biological Farming, and little evidence to support the claims around it, Jacqueline says that proponents of Biological Farming, though well meaning, may be heading down the wrong track. Strong scientific backing is vital to informing decisions around farming systems and environmental impacts.

With all the mysteries surrounding soil carbon, we are a long way off measuring and rewarding those storing carbon in their soil (see this Parsons and Rowarth 2009 article on measuring soil carbon under Kyoto on pages 2, 5 and 6). So, if you wanted to start Biological Farming only to store carbon in your soil, then perhaps you should wait for more evidence. And you need to be careful who you decide to listen to. Though Jacqueline is sceptical, Troy Baisden thinks that there’s a reasonable chance that Biological Farming doesn’t lose soil carbon, even if we may not be sure whether it would gain soil carbon.

In terms of switching from an intensive farming system to a biological farming system then, it’s a big risk to do it just to store more carbon in your soil. To decide to become a Biological Farmer, you would have to be convinced by some the other arguments outlined in the Carbon Farming’s document, attached to this post. No doubt, as evidence starts to accumulate, the debate on Biological Farming will continue for some time.

Many thanks to Rick Braddock, Troy Baisden, Jacqueline Rowarth and Louis Schipper for their help in putting this post together.

Reference

Schipper, L.A.; Parfitt, R.L.; Ross, C.; Baisden, W.T; Claydon, J.J.; Fraser, S. (2010) Gains and losses in C and N stocks of New Zealand pasture soils depend on land use. Agriculture Ecosystems and Environment. 139: 611–617. doi:10.1016/j.agee.2010.10.005.

Further reading

Parsons, A.J.; Rowarth, J.S., Newton, P.C.D. (2009) Managing pasture for animals and soil carbon. Proceedings of the New Zealand Grassland Association. 71: 77-84.

Thorrold, Bruce (May 2012) The Biological Farming Debate. Grassland News. New Zealand Grassland Association. 2-3.

http://www.nature.com/nature/journal/v485/n7397/full/nature11069.html

Recently announced changes to the New Zealand ETS

This blog post is by Motu Research Analyst Zack Dorner.

A couple of weeks ago, the New Zealand government announced changes to the Emissions Trading Scheme (ETS) based on a review last year of how it was operating, and recent consultation on proposed changes. This blog post summarises and comments on some of the key points in relation to agriculture.

In terms of agriculture, while processors (such as Fonterra) must report on their emissions as of this year, they do not have to face any costs of their biological emissions until after at least 2015.

In 2015 there will be a review of whether or not they should have to face any of these costs. The next election is scheduled for 2014, and this decision could be highly dependent on who leads the next government. Labour’s policy at the last election was for agriculture to start facing the cost for some of their biological emissions in 2013.

It is worth noting that the government is keeping its price cap on CO2 emissions at $25 per tonne, which means a reduction in this cap over time as it is not being adjusted for inflation. Furthermore, the government is keeping our ETS strongly linked with international markets, which are currently highly dependent on the EU carbon price. The EU carbon price is highly dependent on their regulatory decisions, meaning the price, when below $25, is highly uncertain. A tonne of carbon is worth less than $7 in New Zealand at the time of writing. The agricultural sector is due to get 90% of their credits for free from the Government once they enter the ETS, with this amount being slowly phased out.

The true cost to farmers and processors also depends on the price they receive for their output, which is set in the international market. Other countries, including those in the EU, are moving towards regulation to deal with their agricultural GHGs (greenhouse gases). Policies like regulation, and also to reduce deforestation can raise agricultural commodity prices. Biofuels are an example of a climate policy which has been argued to have raised agricultural commodity prices in recent years due to increased competition for agricultural land.

Our farmers cannot pass on the exact costs of the ETS on to consumers as they face international prices for their produce. However, even if farmers overseas are not facing similar carbon charges, they may be facing other policies which cause international commodity prices to rise, which can help compensate New Zealand farmers for costs under the ETS. The food security issue from higher prices for goods like meat and milk is something for another post.

Uncertainties around commodity prices, carbon prices and entry date into the ETS mean the New Zealand agricultural sector faces large uncertainties as to the future costs they will face under the ETS.

As recommended by the ETS Review Panel last year, the Government would like to move to a farm level for reporting on emissions, which would ultimately mean farmers would have to pay directly for their emissions.

The ETS deliberately sets the point of obligation for participants as high up the supply chain as possible. This is so that, for example, petrol and energy companies do the trading of emission permits, and pass price signal on to consumers, rather than having over 4 million New Zealanders all accounting for their own emissions.

Agricultural emissions are a bit different. Under the current processor-level system, processors are charged on the basis of the national average emissions for every unit of output they produce. This means there are not tens of thousands of farmers in the ETS. Emissions are lowered through processors and farmers (who ultimately may bear the costs) convincing other farmers to mitigate, to lower the national average level of agricultural emissions per unit of output.

Using a farm level ETS, farmers could be directly rewarded for action they take themselves on their own unique farm. By measuring each farm’s emissions, mitigation actions don’t get lost in the surveys done to create national average emission data and the incentives are much stronger for individual farmers to take action to lower GHGs on their farm.

A farm level ETS would require farmers to run a computer programme like OVERSEER, which takes a detailed snapshot of their farm, and models their GHG emissions. OVERSEER is not perfectly accurate, but it is impossible to measure each animal’s emissions directly so it’s a good second best option and is constantly being updated and improved.

There are a number of administrative issues to be worked out before a farm level scheme is viable. It looks to be worthwhile though given it allows farmers much more scope for reducing their emissions and directly rewards them for good behaviour.

Finally, the government notes that it is currently investing over $18 million per annum into research to reduce New Zealand’s agricultural GHGs.

It is true that we are relatively one of the most efficient producers of meat and milk products in the world. New Zealand’s emissions per unit of agricultural output have been reducing at a rate of about 1.3% per year over the last couple of decades. This means a reduction in the amount of emissions per litre of milk, not necessarily an overall reduction, as our overall production has also increased. These reductions in emissions per unit of output have been due to productivity gains – getting more milk per cow for example – and not due to specifically trying to reduce our GHGs (see 2011 ETS review).

So would putting a price on agricultural emissions encourage and facilitate New Zealand farmers to continue to be the best in the world? Is this important for our clean, green brand and to help other countries lower their agricultural emissions? Will putting farmers into the ETS drive their production down, forcing production overseas to places where they are less efficient and do not have to pay for their emissions (so called “leakage”. This issue is briefly addressed in this blog post and this Motu article)? Are there other ways of encouraging our farmers to be greener?

These questions are at the heart of the debate on if/when New Zealand should bring its farmers into the ETS, and no doubt the debate will continue in the years ahead.

Watch this blog for future posts on some solid suggestions from Motu’s Agricultural Emissions Dialogue group as to how we can start dealing with our agricultural emissions. They look outside the ETS as to how we can bring about behaviour change amongst farmers. It is important to remember that reducing our emissions is what we really want, and a lot needs to happen alongside an ETS to achieve this. We don’t want to get bogged down in a heated debate about the current ETS, and lose sight of the big picture.

Further listening/viewing:

Click this link for a good debate between Cath Wallace and William Rolleston on National Radio

There is a good discussion here of mitigation options for agriculture, by Harry Clark

Here is Tim Groser, Climate Change Minister, on The Nation

Some Comments on William Rolleston's recent column

This blog post is by Motu Research Analyst Zack Dorner.

In case you missed it, here is an opinion piece published in the Sunday Star Times on 15 April by William Rolleston, vice-president of Federated Farmers. It covers his views on bringing agriculture into the New Zealand Emissions Trading Scheme (ETS). It comes as the Government is consulting the public on a new series of changes to the ETS.

In the opinion piece, Rolleston states:

Farmers here are encouraged to see agriculture's enrolment [in the ETS] on hold until mitigation technologies are available and other countries "make progress". Such pragmatic preconditions don't go far enough. 

Although that may be Federated Farmers’ understanding of the Government’s current position, the first of what are to be regular reviews of the ETS recommended that agriculture come into the ETS in 2015, the date currently in the legislation (see page 47 of this document). The panel recommended this on the basis that there are some Greenhouse Gas (GHG) mitigation options available to farmers, and all other sectors are facing the costs from their emissions.

 It is also important to note though that there is an important difference between the current processor-based ETS (where agricultural emissions are charged at the processor level, eg Fonterra) and a farm-scale ETS.

Farmers have almost no ability as individuals to influence their liability under the current processor-based system in the legislation; therefore inclusion of agriculture may have very little effect on on-farm mitigation. Including agriculture in this situation would mostly send a signal of government’s longer term intentions and shift some of the cost of meeting our domestic reduction targets onto farmers. 

A farm scale ETS would incentivise farmers to take mitigation actions on their farm as this would reduce their liability. The ETS review panel did show a strong preference for a farm scale ETS, though it noted significant administrative barriers to doing this must be worked through (page 49).

Rolleston goes on:

Federated Farmers considers it a necessity that our competitors bring agricultural biological emissions into their schemes before we do likewise. Otherwise, all that will happen is carbon leakage to less efficient carbon production systems.

Unless New Zealand farmers can get a premium for our products overseas on the basis of being a part of an ETS, our farmers face the world price for their product, and therefore cannot pass the costs of their emissions on to their consumers unless other countries put a price on their agricultural emissions. You can argue about whether or not it is fair for our farmers to face these costs while not being able to pass them on to the consumer. 

What’s the evidence for leakage being a problem in our agriculture sector? 

It is important to note here that leakage will likely result in higher global GHG emissions, even if similarly efficient producers take over production. This is because New Zealand operates under an ETS cap, under which reductions in emissions in one sector will be replaced by an increase in emissions in another sector. A reduction in agricultural emissions which are replaced by production overseas would likely be replaced in a country outside of a cap, and lead to an overall increase in emissions.

We have a large amount of prime agricultural land which profitably and efficiently produces agricultural goods, and not much of it is likely to change out of farming due to the ETS. Empirical evidence suggests the ETS is unlikely to induce much land use change.  There may be some risk at high carbon prices; more of these issues and potential remedies covered in this Motu Working Paper (especially pages 7 and 8).

Our agricultural sector is very efficient in terms of emissions at producing milk and meat compared with the rest of the world. This is around Rolleston’s final point.

So where to now? Some positive recognition of agriculture's impressive carbon leadership would be welcome. New Zealand agriculture has, during the past 20 years, reduced emissions in every single unit of agricultural product by about 1.3 per cent each year. As a biotechnologist and farmer, I advocate giving science a chance, through the agricultural greenhouse gas research centre.

The more GHG emissions from our agricultural sector we can reduce, the better. The trick is to figure out how to best incentivise farmers to continue to lower their GHGs per unit of output into the future. Yes, we need more research into mitigation. But we also may need some way of getting farmers to take into account the GHGs of their production, and to keep pushing them to lower their emissions.  

And given New Zealand farmers are so efficient at what we do, we can play an important role as a world leader on agricultural mitigation and policy to encourage it. Through leading the way, we really can punch above our weight to lower global agricultural GHG emissions.