Progress 07/01/04 to 06/30/09
Outputs
OUTPUTS: An evaluation of the feasibility of permit trading in the Bear River Watershed in order to reduce total phosphorus was completed by the funding of this Experiment Station project and supplemental support of the Bear River Commission and U.S. Environmental Protection Agency. Field saturation and phosphorus delivery ratios were developed by using water quality modeling and GIS techniques applied to mainly the Middle Bear, Spring Creek and Little Bear reaches of the Bear River system in Utah. The focus of the project was to analyze and provide information for trading partners and trading strategies, such as trading strategies between point and non-point phosphorus source entities and/or trading associations. Moreover, alternative market structures for trading were evaluated to determine the feasibility of trading in an interstate setting in order to meet total phosphorus standards now being implemented in the Bear River Watershed via Total Maximum Daily Load (TMDL) regulation as imposed by State of Utah and U.S. EPA directives to carry out the Clean Water Act. Alternative strategies that were evaluated in terms of market efficiency included trading in allowances, trading in total phosphorus reduction credits derived from phosphorus reductions below TMDL reduction allocations, and trading strategies among point source and non-point source asssociations. Trading feasibility and attractiveness also depends on great differences in phosphorus reduction technology and costs of such reduction. PARTICIPANTS: T.F. Glover is the lead economic researcher of this project. TARGET AUDIENCES: The target audiences for the information derived from the findings of this project include primary agricultural producers, governmental policy agencies, and and other land owners who come under pollution control directives. PROJECT MODIFICATIONS: Nothing significant to report during this reporting period.
Impacts
The cost analysis completed confirmed that there there are large differences in costs of phosphorus reduction between waste water treatment plants and the implementation of best managment practices (BMP's) that can be operated by non-point pollution entities such as agricultural operations within the Bear River basin with much lower costs associated with BMP installation and maintenance. So there is a basis for financial attractiveness to initiate a trading scheme. The economic investigation concluded that a market in allowances is the most feasible strategy for trading and is the most market-oriented of the strategies investigated. Under this market-like mechanism of control all sources are brought under the regulatory mandate in a fully capped system. That is, total phophorus discharge allowed is the amount specified by the TMDL. The market operation of this system is termed a cap-and-allowance market or CAM form of trading market. In the allowance, or cap-and-allowance market system, the commodity being traded is an allowance to discharge a limited level of phosphorus which is defined in advance of program implementation by the regulating agency. The allowance program can be written into a memorandum of understanding which outlines the trading program and its details and intended operation. Dischargers know exactly how much they own in allowances and how the ownership can be used. The discharge source is given both exchange flexibility and effluent control flexibility which, along with the opportunity to buy and sell creates financial incentives internal to the control process that promote innovation to find lower cost solutions to meet the water quality standard. Exchange flexibility is the permission to transfer discharge to different contract locations and across time periods. Waste control flexibility gives the discharge source discretion to choose the control technology, innovate to find new control technology that matches specific production processes, and lower the cost of control. However, the discharge still has to meet the water quality standard and the sum of the allowances has to equal the standard. Initial allocation systems are now being developed by the Utah Division of Water Quality based on the allocation directives, the field concentrartion data, and the delivery ratios developed in the study. The Utah Division of Water Quality and The Cutler Reservoir/Bear River Advisory Group have now been meeting to assist in the development of a TMDL for dissolved oxygen and total phosphorus The Logan City Waste Water Treatment facility that handles the municipal waste for seven of the largest communities in the Cache Valley portion of the Bear River Watershed is a major source of Phosphorus to the Cutler reservoir. The Advisory Committee is currently attempting to develop a Memorandum of Agreement with the stakeholders that would allow a water quality trade via a water quality allowance for the waste water treatment facility under Clean Water Act regulatory provisions. The allowance will be based on the equivalent cost of reduction from nonpoint sources. The exchange rate that is being used is $205 per pound of total phosphorus.
Publications
- No publications reported this period
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Progress 01/01/08 to 12/31/08
Outputs
OUTPUTS: An evaluation of the feasibility of permit trading in the Bear River Watershed in order to reduce total phosphorus was completed by the funding of this Experiment Station project and supplemental support of the Bear River Commission and U.S. Environmental Protection Agency. Field saturation and phosphorus delivery ratios were developed by using water quality modeling and GIS techniques applied to mainly the Middle Bear, Spring Creek and Little Bear reaches of the Bear River system in Utah. The focus of the project was to analyze and provide information for trading partners and trading strategies, such as trading strategies between point and non-point phosphorus source entities and/or trading associations. Moreover, alternative market structures for trading were evaluated to determine the feasibility of trading in an interstate setting in order to meet total phosphorus standards now being implemented in the Bear River Watershed via Total Maximum Daily Load
(TMDL) regulation as imposed by State of Utah and U.S. EPA directives to carry out the Clean Water Act. Alternative strategies that were evaluated in terms of market efficiency included trading in allowances, trading in total phosphorus reduction credits derived from phosphorus reductions below TMDL reduction allocations, and trading strategies among point source and non-point source asssociations. Trading feasibility and attractiveness also depends on great differences in phosphorus reduction technology and costs of such reduction. PARTICIPANTS: T.F. Glover is the lead economic researcher of this project. TARGET AUDIENCES: The target audiences for the information derived from the findings of this project include primary agricultural producers, governmental policy agencies, and and other land owners who come under pollution control directives. PROJECT MODIFICATIONS: Nothing significant to report during this reporting period.
Impacts
The cost analysis completed confirmed that there there are large differences in costs of phosphorus reduction between waste water treatment plants and the implementation of best managment practices (BMP's) that can be operated by non-point pollution entities such as agricultural operations within the Bear River basin with much lower costs associated with BMP installation and maintenance. So there is a basis for financial attractiveness to initiate a trading scheme. The economic investigation concluded that a market in allowances is the most feasible strategy for trading and is the most market-oriented of the strategies investigated. Under this market-like mechanism of control all sources are brought under the regulatory mandate in a fully capped system. That is, total phophorus discharge allowed is the amount specified by the TMDL. The market operation of this system is termed a cap-and-allowance market or CAM form of trading market. In the allowance, or
cap-and-allowance market system, the commodity being traded is an allowance to discharge a limited level of phosphorus which is defined in advance of program implementation by the regulating agency. The allowance program can be written into a memorandum of understanding which outlines the trading program and its details and intended operation. Dischargers know exactly how much they own in allowances and how the ownership can be used. The discharge source is given both exchange flexibility and effluent control flexibility which, along with the opportunity to buy and sell creates financial incentives internal to the control process that promote innovation to find lower cost solutions to meet the water quality standard. Exchange flexibility is the permission to transfer discharge to different contract locations and across time periods. Waste control flexibility gives the discharge source discretion to choose the control technology, innovate to find new control technology that matches
specific production processes, and lower the cost of control. However, the discharge still has to meet the water quality standard and the sum of the allowances has to equal the standard. Initial allocation systems are now being developed by the Utah Division of Water Quality based on the allocation directives, the field concentrartion data, and the delivery ratios developed in the study. The Utah Division of Water Quality and The Cutler Reservoir/Bear River Advisory Group have now been meeting to assist in the development of a TMDL for dissolved oxygen and total phosphorus The Logan City Waste Water Treatment facility that handles the municipal waste for seven of the largest communities in the Cache Valley portion of the Bear River Watershed is a major source of Phosphorus to the Cutler reservoir. The Advisory Committee is currently attempting to develop a Memorandum of Agreement with the stakeholders that would allow a water quality trade via a water quality allowance for the waste
water treatment facility under Clean Water Act regulatory provisions. The allowance will be based on the equivalent cost of reduction from nonpoint sources. The exchange rate that is being used is $205 per pound of total phosphorus.
Publications
- No publications reported this period
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Progress 01/01/07 to 12/31/07
Outputs
OUTPUTS: One of the main objectives of this agricultural research project is the investigation of the role of contracts in promoting efficiency and growth in U.S. agriculture. A key contracting process in this sector is agricultural insurance which has been offered since 1938 to allow farmers to modify both price and production risk and which is currently managed via the Risk Management Agency (RMA). A central question in agricultural insurance is how to price the contracts. The traditional approach to valuing such contracts is the use of actuarial pricing methods but these methods have now given way to financial valuation models. Financial models have been considered superior to the actuarial methods since they account for the role of diversification and portfolio management that is reflected in the market price of the risk that is embodied in the insurance contract. The least complex and certainly the most commonly used financial model used for valuation of insurance contracts is
the present value approach whereby the premium schedule is set equal to the present value of the expected indemnity. Valuation using the present value framework has both an advantage in ease of calculation assuming a variety of probability distributions for the index of farm revenues and the fact that the formula is not influence by the returns on other assets other than the risk-free asset return. However, this approach values the market risk inherent in issuing such contracts at zero. That is, insurers are assumed to act as if they are risk neutral and do not incur operating costs. This implication may not be off the mark for management and underwriting by government agencies and if the risks being insured are fully diversifiable. Arbitrage-based models such as extensions of the Black-Scholes formula have also been used to value the risk, but under certain conditions these extensions are identical to the present value approach and also possess the weakness that the market price of
risk remains an undetermined parameter. We have introduced what could be called a heterogeneous agent equilibrium model for valuation of agricultural insurance contracts. This approach allows for heterogeneity in risk aversity and alternative assumptions about agricultural revenues relative to non-agricultural and/or national income measures. This approach could have relevance to both economies dominated by agricultural revenues and risks and economies where agriculture is a small part of national income. Moreover, the model can apply to alternative forms of the insurance industry and management of agricultural insurance contracts. Valuation of new forms of insurance products can be accomplished using the approach. Under limiting cases (alternative parameter assumptions) this more flexible model resembles the present value and general equilibrium approaches to insurance contract valuation that have been the more common approaches of financial valuation of contracts.
PARTICIPANTS: T. F. Glover is the lead economic researcher of this project.
TARGET AUDIENCES: The target audiences for the information derived from the findings of this project include primary agricultural producers, governmental policy agencies, and suppliers and other operatives in agricultural markets.
Impacts
Agricultural insurance contracts and their valuation under alternative forms of price and production risks have become an important issue not only in the U.S. economy but also in economies that are quite different in complexity from that of the U.S. The valuation problem is one of setting the premium schedule to reflect the risk of guaranteed revenue relative to actual derived revenue with the latter varying both because of market price variability and production variability. Such contracts and the approaches to valuing them have come under considerable review by agencies involved in the design of premium schedules for new insurance products in the agricultural sector that do not fit the assumptions of the traditional approaches. In the U.S., the Risk Management Agency continues to expand the types and coverage of insurance offered to farmers facing a variety of risks. Moreover, multiple-peril yield insurance is now supplemented with catastrophic risk coverage, farm
and area based revenue insurance products, and area based yield insurance that relate to differing risk conditions. There is also concern about matching valuation to alternative attitudes toward risk in the agricultural sector. Some of the traditional financial valuation models have been called into question because of the rigidity of the assumptions that are put in place in alternative valuation formulae in order to value the risk and the price of risk in developing alternative and more flexible contracts. Analysis of alternative models suggests that there are more flexible and applicable approaches to the valuation of alternative risk insurance contracts and additional sets of insurance products that can be offered to agricultural producers either on an area basis or on an individual farmer risk condition basis. We offer a heterogeneous agent equilibrium approach that can account for possible alternative attitudes regarding risk and also is based on the general equilibrium valuation
approach that has some of the same ease of computation features of the traditional present value approach but includes more risk condition variety. This approach could be used value contracts in both a mature agricultural industry setting as represented by the U.S. agriculture sector and economy as well in a less developed economy where agricultural revenues are a larger part of national economy revenues and greatly influence the national economic conditions. Under certain limiting conditions this model mimics, and has the same computational advantages of, the widely used present value approach, as well as the arbitrage-based options and the existing general equilibrium approaches. The approach can accomodate a variety of new agricultural insurance products that are now being offered particularly in the U.S.
Publications
- No publications reported this period
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Progress 01/01/06 to 12/31/06
Outputs
Both farm and agribusiness firms are faced with the problem of complying with environmental regulations that are being implemented, primarily water quality in the form of total maximum daily load limits (TMDL). The actions taken to comply with these regulations involve several new production/input use practices (best management practices commonly referred to as BMPs). Dairies and animal feeding operations also come under CAFO rulings. Little is known about the impacts that compliance efforts have on production technical efficiency of these firms. Production data from a small cross section sample of dairies in Utah and southern Idaho were used to derive estimates of technical efficiency using a Bayesian stochastic frontier analysis. Both dairy operations that have invested in alternative manure management and field BMPs as well as those using conventional management practices were included in the sample. Over 60% of those firms which invested in the alternative
practices also received matching government subsidies. A flexible form production function was used and estimated using the data on milk production as output, and with herd size, irrigated acres, fertilizer and chemical expenditure, feed expenditure, and capital invested in alternative best management practices adjusted for subsidy as production inputs. Point and interval estimates of technical efficiency were then derived using the estimated production function and stochastic frontier using the exponential distribution. Technical efficiency estimates mainly clustered around the 0.78 - 0.85 suggesting that the majority of the dairies in the sample achieve 78 - 85% efficiency in milk production operations. Those dairies that invested in alternative manure and crop management practices ranged from 69 - 85% in technical efficiency. However, there are a significant number of dairy operations that are technically inefficient ranging downward to 32% efficiency. The inputs of greatest
influence on milk production are of course the herd size, and then followed by feed expenditure. The quasi-fixed capital input does have significant influence on production as well and is influencing increased technical efficiency.
Impacts
Dairy farm managers have been involved in the process of reducing nutrient loads originating from their dairy operations to meet total maximum daily load stream regulations. Considerable adjustment in both manure and crop management practices are required to achieve these reductions and many have relied on government subsidy programs to match investments made to adopt the alternative management practices. However, to this point little is known about how these practices affect production efficiency in these operations. Anecdotal evidence would suggest that there is a rather acute tradeoff between production efficiency and managing the nutrient load reductions. However, evidence from the estimation of a stochastic frontier production model using a sample of Utah and Idaho dairies suggests that dairies who have invested to adopt these practices range in technical production efficiency from 69% to 85%. The dairy industry is a very mature industry and relatively efficient
even with considerable investment in pollution reduction operations but also with the matching of considerable subsidy. These levels of efficiency are primarily achieved in large-herd operations whereas small-herd operations are much less efficient and it is difficult to acquire the capital to make the investment in the alternative practices.
Publications
- Said,A., D. Stevens, T. Glover, W. Walker,and T. Hardy. 2006. Exploring an innovative watershed management approach: from feasibility to sustainability. International J. Energy 31(13):2373-2386.
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Progress 01/01/05 to 12/31/05
Outputs
One of the objectives of this project was to develop economic information on the viability of alternative new by-product handling enterprises that can be initiated to mitigate environmental problems and generate alternative on-farm benefits and or income. Utah has several dairies ranging from 20-cow herds to over 1500-cow units and these farms face the problem of manure management and nutrient load reduction, the latter in response to Total Maximum Daily Load (TMDL) regulations that are being implemented. The current research effort of this project, in connection with a project sponsored by the U.S. Department of Energy and Utah State University Center for Profitable Uses of Agricultural Byproducts to build a prototype induced blanket reactor (IBR) and implement the IBR on a Utah dairy, focused on investigating the cost structure and capital investment requirements for implementing the conversion of manure to biogas and, in turn, to small-scale electricity production.
The IBR being implemented is an in-vessel high rate anaerobic digester for converting animal manure. The digester can convert the manure into water, soil conditioner and biogas for generating electricity. The system is automated with a computer controller and operates with minimal labor effort. The system started operation in the spring of 2005 and has produced up to 4 ft3/ft3 digester capacity/day of biogas that is approximately 55 % methane. The generating engine has been running on biogas. The operations of the system are in early stages, however, investigation of costs of this operation using the preliminary information available suggest that cost reductions can be obtained as output is expanded. There appears to be considerable benefit to learning as operations proceed, which also suggests that costs can be reduced as both experience in the loading and conversion processes expands. To this point, only a preliminary investigation of the possibility of contracting for additional
manure handling to take advantage of economies of scale has been completed. Cost reductions do suggest there are benefits to expansion, but expansion via contracting to other dairies for feedstock also presents some contracting problems associated with cost information asymmetries between the processor and the potential outside feedstock producers.
Impacts
The initial successful operations of the IRB process of conversion suggest that manure handling and conversion to biogas can generate both on-farm benefits/income and the reduction of nutrient loads originating from dairy enterprises. Dairy farm managers have been facing the prospects of reducing phosphorus loads in order to comply with recent implementations of TMDL regulation and joining associations in order to trade total phosphorus permits. Successful manure conversion technology and reduction in costs as conversion expands appears to be a promising prospect for these managers whose economic need is to lower the costs of TMDL compliance. Successful operation of the digester system also holds promise for beneficial conversion of manure from Utah cattle and hog feedlots.
Publications
- No publications reported this period
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Progress 01/01/04 to 12/31/04
Outputs
This project was just initiated in July 2004. The overall research objective of this project is to derive the economic impacts of incomplete/asymmetric information and associated market structure on contractual arrangements, firm organization, and decision processes in the agricultural setting. The research efforts of this project to this point are combined with investigations just initiated under the sponsorship of the U.S. EPA, U.S. DOE, and the Utah State University Water Initiative. An economic analysis of a water quality trading system within the Bear River watershed has commenced with support of the U.S. EPA and Utah Water Initiative. Total Maximum Daily Load (TMDL) regulation has been proposed for areas of the Middle and Lower Bear River system. The marketing of phosphorus permits is being investigated as a means of implementing these TMDL standards at lower cost to stakeholders. Additionally, an economic investigation of investment issues and production
processes of alternative manure/biomass management via digester operations in Weber and Cache Counties in Utah and in Jerome County, Idaho, has just been started under sponsorship of the U.S. DOE. The lack of markets for these alternative enterprise producers and processors, and uncertainty about the viability of biomass electricity generation, imply that relationships between producers and processors will by governed by dynamic contracts. Limitations in the contractual arrangements, however, may prohibit enterprises from realizing the full economic benefits accrued through learning and cost reduction, which, in turn, could be a major impediment to the emergence of this kind of industry and its connection to agriculture and water quality improvement. These issues of incomplete information and contracting are the focus of the startup studies. The influence of alternative price and surface water allocation changes on agricultural water use and revenues as well as water conservation in
general is also being investigated under the sponsorship of this project.
Impacts
The implementation of a water quality trading system within the Bear River watershed could reduce the cost of nonpoint source compliance with TMDL regulations now being proposed for water quality improvement in the lower and middle Bear River system. If alternative manure management operations could become economically feasible enterprises, they could be used as part of the nonpoint source TMDL compliance process, particularly for relatively higher cost phosphorus abatement operations within the Bear River watershed.
Publications
- No publications reported this period
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