Economic and risk analysis of sustainable practice adoption among U.S. corn growers

Abstract

CONTEXTAgricultural sustainability has three main pillars: a healthy environment, economic profitability, and social equity. Most programs, however, focus on environmental benefits when establishing protocols for farms, de-emphasizing or ignoring the economic and social aspects. This focus on the environmental aspects of agricultural sustainability misses the importance of economic factors that are commonly found to be key determinants of farmer adoption of best management practices. More research on the economic effects of sustainability practices on farm income and risk would improve understanding and facilitate communication with farmers about the tradeoffs and risks when using the protocols. OBJECTIVESOur study has two primary objectives. First, we quantify the effects of sustainable practice adoption on the mean, variance, and skewness of yield for U.S. corn farmers. Second, based on the estimated yield risk model, we quantify the effects of sustainable practice adoption on farmer returns and the cost of risk to better understand the impacts of sustainability on farmer welfare. METHODSUsing the 2010 Agricultural Resource Management Survey, we construct a composite indicator proxying the intensity of sustainable practice adoption for 73 practices mostly intended to reduce soil erosion and improve nutrient and pest management. We use this indicator in a flexible moment-based approach to analyze field-level corn yield data. Estimation results are used to quantify expected farmer returns and the cost of risk (the risk premium). The cost of risk is decomposed into costs from variance (symmetric variation around the mean) and from skewness (downside risk from unusually low yields). RESULTS AND CONCLUSIONSResults indicate that substantial opportunities exist for US corn growers to increase sustainable practice adoption. Increased sustainable practice adoption significantly increased mean yield and decreased yield variance and skewness. In addition, increased adoption of sustainable practices increased expected farmer returns and, in most cases, also increased the cost of risk mostly from increased costs from lower skewness (greater downside risk). The positive effect of increased expected income always dominated the negative effect of increased costs of risk, so that on average farmer welfare increased with higher levels of sustainable practice adoption. SIGNIFICANCEOur study helps fill a literature gap by evaluating the economic aspects of sustainability, specifically farm income and the cost of risk. The results provide critical information for policy making and program establishing.