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West National Support Center Fact Sheet: Econ 01.01

Title: An Explanation of Conservation Technology

URL: http://ssiapps.sc.egov.usda.gov/RequestTracker/DefaultIssueList.aspx?pid=1&cid=0&pa geid=0&keywords=

Date: September, 2006

Keywords: conservation technology; economics; technological progress; efficiency; ; ; allocation of ; budgets; agricultural conservation; classification standards

Author: Kevin P. Boyle, Agricultural Economist, USDA, NRCS, WNTSC USDA, NRCS, WNTSC (West National Technology Support Center) 1201 NE Lloyd Blvd Suite 1000 Portland, OR 97232 phone: 503-273-2411 fax: 503-273-2401 email: [email protected] sites: ssiapps.sc.egov.usda.gov

Abstract: Conservation technology matters. Good technology helps businesses to improve, to be protected, economies to grow, and people to find satisfaction with the environment. This economics explanation of technology can broaden a conservationist’s understanding of conservation technology.

Outline Introduction. - page 2. What is technology? – page 2. How is technology measured and documented? - page 3. What are the standards used by economists and analysts to document technology? - page 4. What’s missing, so far, from this economics explanation of technology? - page 5. How can I use an economics point of view about technology to improve conservation? - page 6. Conclusion. - page 9 Appendix A. Glossary. - page 10. Appendix B. How-To Examples. - page 12. Sample References. - Page 13 Introduction The United States Department of Agriculture, Natural Resources Conservation Service (NRCS) helps farmers and ranchers adopt new conservation . NRCS accomplishes this by offering to pay producers to participate in national conservation programs. Producers receive incentive payments for adopting new, or improved, conservation technologies, such as terraces, grassed waterways, and tillage practices. NRCS refers to these conservation technologies as ‘conservation practices’.

NRCS defines a minimum level of quality, a ‘practice standard’, for each technology. These standards ‘contain information on why and where the practice is applied, and sets forth the minimum quality criteria that must be met during the application of that practice in order for it to achieve its intended purpose(s)’. These practice standards can be general – the standard for Alley Cropping specifies that ‘trees or shrubs will be oriented on or near the contour to reduce water erosion’. And they can be detailed –the one for a Dike states that: ‘for dikes constructed of compacted earth fill material shall be a minimum of 5% of the dike height’.

Since the promotion of conservation technology is a basic business of NRCS, conservationists might be interested in knowing more about technology –such as how other disciplines, like economics, view this subject. This fact sheet explains how a conservationist can use an economics explanation of technology to improve their conservation technologies, programs and projects.

What is technology?

An economist defines technology in terms of the inputs that are used to produce outputs. A minimum tillage conservation technology uses inputs such as a tractor, a tractor driver, a no-till drill, and soybean seeds. The outputs from minimum tillage might include a soybean crop, but it also includes a reduction in the amount of soil erosion taking place on a field.

Inputs are the resources expended, or used up, in the production of . , or durable, inputs are not fully used up during a production process. Examples include tractors, barns and tools used by farmers to produce a crop this year. Expendable inputs are fully used up during a production process. Examples include the feed and medicine used by ranchers to produce livestock this year. Note that Attachment 1 is a glossary of the terms used in this fact sheet.

Many new technologies require that the managers of firms learn new skills and knowledge. These work process, or managerial, improvements, may involve the use of few, if any new physical inputs. Instead, managers must figure out how to use their existing resources, including their natural resources, in better ways. Investments in new knowledge and skills are often referred to as ‘’ improvements.

Outputs are the products, goods, and services produced as a result of the technology used by a firm and the knowledge and skills of the people doing the work. Examples include accounting services, vegetable crops, and veterinary advice.

Outputs sometimes affect more than the producer of the output. These types of outputs, known as ‘externalities’, can be good or bad. For example, the open spaces that accompany crop production are often enjoyed by travelers passing by farm fields. The producer of the open space can’t capture the enjoyment felt by those travelers, so the open space ‘output’ is external (a positive ) to their business. Examples of ‘bad outputs’ (negative externalities) are pollutants such as smoke, chemicals, or noise, which may leave a factory or field and disturb the neighbors.

How is technology measured and documented?

A key difference between how an economist, or business analyst, views technology and how say, a conservationist, might view a new technology involves how these respective disciplines measure and document the technology. As already pointed out, NRCS conservationists use ‘practice standards’ that provide descriptions of a technology –such as a definition, the purposes, and the minimum conservation performance expected.

In contrast, economists tend to use numbers, backed up by mathematical models, to document and analyze technology. The most basic model used by economists, known as a , says that the quantity of output produced depends upon (i.e. is a function of) the quantity of inputs expended. For example, corn may yield 100 bushels of outputs using 100 units of N input, 125 bushels using 125 units, and 140 bushels using 150 units.

Economists and business analysts add to production functions to gain insight into how the managers of firms use technology and make decisions. The resultant class of models rests on the belief that the managers of firms respond to economic incentives, especially prices. When the of a key output increases, managers will try to produce more of it. They’ll invest in new conservation technologies if offered sufficient incentives, in the form of cost-share payments.

The first of these decision-making models, the Investment model, claims that firms make investments when the return on investment is high enough. A farmer will invest in a new irrigation system if the resultant increase in crop returns offsets the installation costs (over time).

The second, the model, claims that the managers of firms try to maximize the profitability of their businesses. They’ll continue raising the amount of output they produce as long as production stays profitable.

Both the Investment and Profit model usually distinguish expendable inputs from durable inputs. Economics text books usually use the terms ‘variable’ and ‘fixed’ costs to these respective inputs.

In practice, analysts use budgets to collect and analyze the data used in these models. A budget describes inputs and outputs in terms of their durability, price, quantity, quality, and timing.

Budgets usually contain a revenue, or benefit, section that describes outputs in terms of prices and quantities ($150 crop revenue = $1.50/bushel x 10 bushels). Budgets also contain a cost section that describes inputs in terms of prices and quantities ($25 fertilizer cost = $.25/unit N x 100 units). The net return of an investment, and the net profitability of a business enterprise, are derived by subtracting costs from benefits, or revenues ($125 net profit = $150 revenue - $25 costs).

Appendix B, ‘How-To Examples’, contains examples of conservation technology budgets, completed on-line. The appendix includes tillage and irrigation case studies that give step-by-step instructions for replicating the results.

What are the standards used by economists and analysts to document technology?

While NRCS conservationists use conservation “Practice Standards” to document conservation technologies, many economists and farm managers use “Budget Standards, or Guidelines” to document technology. These standards, or guidelines, provide guidance about a budget’s calculations, terminology, and appearance (examples can be found in Attachment 2).

Budgets use the term ‘Operating Costs’ to value inputs (i.e. expendables) that are fully used up during a production period. They use the term ‘Allocated Overhead Costs’ to value inputs that are not fully used up (i.e. capital) during a production period. Budgets usually take into account that, due to inflation, a dollar on hand today may be worth more than a dollar received tomorrow, by using discounted revenues and costs.

The term ‘allocated overhead’ may be unfamiliar to many people. Some inputs, such as tractors, buildings, and services, can be shared by several business enterprises over multiple production periods. In order to determine a cost for these types of inputs, they have to be ‘allocated’, in some manner, among the different enterprises and production periods.

Some budgets, such as those used in Investment models, have to use the full cash installation cost of an input. For example, a cost estimate to build a house usually includes the full cost of a heating unit even though the unit lasts for 15 years or more. These budgets may use the term “Capital Costs” to refer to the value of capital inputs that must be fully expensed (i.e. not allocated) during the investment period.

What are some of the key goals an economist has when they document technology?

Besides the practical goals of understanding business technology, profits and returns on investment, economists usually document technology for broader purposes. A key goal of economists is to understand incremental, or marginal, changes taking place in the models underlying the documentation. These marginal changes point to the mathematically ‘best’, or ‘optimum’, outcomes for investment and production decisions. For example, the models suggest that the best level of investment is to continue investing as long as the incremental return exceeds the incremental cost. The best level of production is where the marginal return from outputs equal the marginal costs of the inputs used to produce the output.

Economists consider these ‘best’ outcomes to be important because that’s usually where inputs (i.e. resources) are being used most efficiently. As with conservationists, one of the goals of economists is to provide guidance about efficient technologies –those do the best job of conserving resources.

Another key goal in the use of these models is to understand changes taking place over time in input and output relationships. Technological progress refers to how businesses improve, and economies expand, as a result of investments in better (i.e. more productive) technologies. Economists, and others, have a strong interest in understanding this source of and natural resource protection.

Many conservationists criticize these types of investment and profit models for not doing a better job of valuing the cost of externalities, especially negative externalities such as pollutants. Nevertheless, externalities are often studied using this class of model.

What’s missing, so far, from this economics explanation of technology?

Some obvious shortfalls in this economics explanation of technology include: 1) Data needs improvement: The data needed to determine marginal relationships, and therefore the best and most efficient outcomes, is seldom available. Finding even simple information about the investment potential of a conservation technology can be very difficult. 2) Externalities are hard to measure and value: Methods for valuing externalities are still evolving. Many of the externalities affect natural resource assets that are not traded in markets. Assigning dollar values to clear views, better wildlife habitat, or long-term stocks of soil, remains controversial. 3) Institutions matter more: The formal institutions that govern conservation behavior –the laws, rules, and incentives, government agencies, and enforcement mechanisms- are usually more important factors in conservation technology adoption than profits and costs. Determining the ‘best’ institutional arrangement for conservation may be an impossible task. 4) Human behavior is complex: People decide on issues that are important to them for psychological and social reasons. The norms of a community may dictate that lawns look a certain way (i.e. green from N fertilizer applications). Business owners make investments, not because they are out for a quick buck, but because they understand what their customers demand. 5) Fairness hasn’t been mentioned: Some people gain and some people lose from changes in technology. Some of the changes may not be fair to some groups of people, especially in the short term. Textile factories switch to countries with lower labor costs, leaving low-income rural people without wages in the displaced .

Look for future fact sheets to address some of these missing points.

How can I use an economics point of view about technology to improve conservation?

This economic explanation about technology can help conservationists in two ways: a) to work with their farm and ranch customers better, and b) to administer their programs better. This section provides suggestions about how conservationists can use this explanation to improve conservation.

The first, or ‘business advice’ use, of this economics explanation, maintains that business managers make decisions based on the best information they can obtain about their production, cost structures, enterprise profitability, and any possible external side-effects of production. Conservationists can use economics to help farm and ranch managers reach business decisions about adopting new and improved conservation technologies. They can use information about the business side of conservation to understand why conservation technologies succeed and fail.

The second, or ‘policy advice’ use, of this economics explanation, maintains that most NRCS programs derive, in some way, from the economics models introduced here. These programs postulate that farm and ranch managers decide whether or not to adopt new conservation technologies based upon the incentives, in the form of cost-share amounts and rates, offered by NRCS. Conservationists can use economics to help adapt national policy to local conditions. They can use information about the policy side of conservation to understand why farm managers participate and don’t participate in their programs.

First, some conceptual suggestions about how conservationists can improve their business advice to customers: 1. Understand the business consequences of the conservation technology being promoted: Numbers matter, both as scientific evidence, and as the basis for business decisions. The formal tools used by economists and business analysts (i.e. budgets) are commonly used by business managers to make decisions. These tools can help conservationists understand why some technologies find greater acceptance than others. 2. Understand customers’ business motivation to adopt conservation: Farm and ranch managers certainly have moral sentiments about conservation, but they still run businesses. Their business motivation for adopting conservation technologies can provide valuable information that might influence other business managers to adopt the same practices. 3. Make business information easier to find: NRCS practice standards seldom include information about the business side of adopting new conservation technologies. Oftentimes, business managers have to discover this type of information from other sources. Conservationists don’t usually need to carry out a business analysis themselves, but they can help in making this type of information easier to find. 4. Understand who customers trust for business advice: Most farming areas have a strong infrastructure in place that provides advice to farmers and ranchers about improved and new technologies. Sources of advice include cooperative extension agents, input dealers, output buyers, lenders, and other farm managers. Try to deliver ‘business advice’ about conservation through these trusted advisors. 5. Understand customers’ reasons for innovating: Many farming technologies have come from business entrepreneurs who were unhappy with how ‘things work now’. They were willing to take risks and invent new technologies. Many conservation technologies result from the same source. See if you can tap into the business innovators to find ways to make “conservation work better”.

Second, some conceptual suggestions about how conservationists can improve their policy advice for administering conservation programs: 1. Understand how to use incentives: NRCS delivers incentive-based programs, mostly to businesses. Although, in practice, this usually means cost-share rates and amounts, business incentives come in a wide variety. Accelerated depreciation allowances can help businesses afford capital-intensive conservation technologies. A well-placed input subsidy can help businesses move from a highly mobile form of nutrient to one that doesn’t leave fields as quickly. 2. Understand externalities and their valuation: NRCS delivers programs to conserve natural resources. This includes cutting down on the nutrients leaving fields and the contaminants leaving livestock areas. Scarce money can be allocated more efficiently to those ‘bad’ outputs that result in the greatest threat of damage. 3. Understand the value of long-term stocks: NRCS has relied for years on soil conservation technologies, although many economists find it hard to prove any short-term advantage in using many soil-conserving technologies. National policies that take a longer-term view of the role of soil, and other valuable resource stocks, understand that important industries depend on sound long-term stock use policies. 4. Look to markets for solutions: The strength of most economies derives from innovators encouraged by free markets to succeed and fail in their business ventures. Markets encourage and make it possible to afford incentives targeted towards conserving natural resources. Markets continue to find innovative ways to deal with resource conservation. International markets are now appearing for carbon trading. Local ‘community-based farming’ markets encourage farmers to use farm inputs in better ways. 5. Strengthen conservation institutions: A previous section briefly mentioned that formal institutions are prerequisites for successful conservation policies. NRCS identifies many of the players in conservation institutions, such as Conservation Districts, as their conservation partners. National, or local, conservation policy needs to include these partners, and other supporting institutions in order to succeed. 6. Be fair: One of the roles of government is to help those who are less well-off. NRCS recognizes this by encouraging limited resource farmers to participate in conservation programs. This might mean promoting less capital-intensive, and less expensive, conservation alternatives. It can also mean increasing the cost- share available to these growers.

Finally, some practical suggestions for improving day-to-day NRCS conservation operations: 1. Pay closer attention to program cost lists. They have more than a program- eligibility dimension. Even if all of the ‘budget standards’ identified in this fact sheet can’t be adopted, costs can still be documented better than now being done. Cost estimates should not be using different calculations, terms, and formats just because a state boundary has been crossed. 2. Standardize the classification of conservation practice terms. When a building contractor does a cost estimate they can turn to an industry-supported labeling system for classifying construction technology. These standards transcend local definition and custom. This makes it easier for them to use and understand the technological and economics data. Work with industry leaders, such as American Society of Agricultural Engineers, to do the same for conservation. 3. Do a better job of documenting conservation technology: A recent training session for new NRCS employees found that several could not identify the difference between a chisel plow and a moldboard plow. Many of the practice standards used in a state don’t have photos, or pictures, that could be used to help understand the technology. Make better use of video, photos, recordings, and modern media to document conservation practices. 4. Improve access to conservation technology information: Internet technology is good enough right now to develop effective networks of conservation technology information. A farmer, rancher, or conservationist should be able to enter a few search parameters, right now, and discover the best conservation technologies available to deal with a resource concern. 5. Carefully document cost-share rates and amounts: These may be the main decision-making ingredient NRCS offers. Is any data or feedback available about their adequacy? Has information been carefully recorded about which ones work best and why? 6. Read farm and ranch management journals and leave the copies around the office for customers to read. 7. Make better use of staff: Most NRCS state offices have an economist on board capable of doing more ‘business, or policy, advice’ work. Let them work more exclusively on economics. Have them document the return on investment of key conservation technologies (even if the return can’t be determined, the technology numbers are still valuable). Let them develop case studies that highlight how farming communities adopted innovative technologies. Even if just five professional cost estimates are done each year, most of a state’s conservation technologies could be carefully documented in a short time. 8. Make better use of trusted business advisors: See if the people providing financial, or managerial advice, are willing to expand this advice to include conservation programs and technologies. Ask their advice about new technologies and programs being promoted.

Conclusion Conservation technology matters. Good technology helps businesses to improve, natural resource assets to be protected, economies to grow, and people to find satisfaction. Economics can play an important role in finding, inventing, understanding and promoting good conservation technology. Appendix A. Glossary:

Note: It may be better to take these definitions directly from the referenced handbooks (i.e. the AAEA handbook)

Technology: The manner by which inputs are used to produce output.

Inputs: The resources, or factors of production, used to produce output.

Capital, or Durable, Inputs: Inputs that are not fully used up during a production process.

Discounting: AAEA definition: “The process of adjusting cost or return streams to a common point in time using market or individual rates of discount”.

Expendable Inputs: Inputs that are fully used up during a production process.

Human Capital Inputs: embodied in labor inputs, such as skills and knowledge, which are used to produce output.

Outputs: Products, goods, and services produced as a result of the technology used by a firm and the knowledge and skills of the people involved in production.

Efficient Technology: Technologies that do the best job or conserving resources. These technologies use fewer, or better, inputs, to produce more, or better quality, outputs.

Externalities: Outputs that not traded and that affect someone else. Not to say they can’t be traded, just nothing in place right now (i.e. European Union has started a carbon trading scheme).

Production Function: A mathematical relationship between inputs and outputs that states that the quantity of output produced depends upon (i.e. is a function of) the quantity of inputs expended (i.e. Y = f(x), where Y is output and x is input and f stands for ‘is a function of’).

Budgets: A description of the inputs and outputs, or technology, used in a production process in terms of their durability, price, value, quantity, quality, and timing.

Investment Model: A mathematical relation between inputs and outputs used to evaluate the claim that the managers of firms try to choose investments in new technologies which have high returns. The model is Net Benefits = Total Benefits - Total Costs.

Profit Model: A mathematical relation between inputs and outputs used to evaluate the claim that the managers of firms try to increase the profitability of their businesses. The model is Net Profits = Total Revenue – Total Costs.

Revenues and Benefits: The economic value of output.

Operating Costs: The costs associated with inputs that are fully used up during production.

Allocated Overhead Costs: The costs associated with inputs that are not fully used up during a production process, and that must be allocated, somehow, among production periods, and production processes.

Capital Costs: The market value of capital inputs that must be fully expensed, rather than allocated, in one budget period for one production process.

Marginal Benefits and Marginal Costs: Changes in the economic value of inputs and outputs arising from a change in input use and/or output production.

Technological Progress: Improvements, over time, in input-output relationships that result in businesses and economies producing more jobs, higher incomes, enhanced natural resource assets, and more material wealth. Appendix B. How-To Examples: Some conservationists complain that economists, and business analysts, don’t bring much practical information, tools, or advice to the conservation planning table. This appendix contains links to practical economics information, completed by the author using on-line tools, and which are being used to provide practical, albeit professional, conservation planning advice.

Example 1. The Investment Model: Irrigation Technology Analysis. Conservation technology is not a local conservation district matter. The technology used to improve irrigation in a California coastal avocado orchard interests other growers, in other countries, trying to conserve irrigation water. This case study introduces seven irrigation technologies being used in a watershed in western El Salvador. The study includes practical, step-by-step instructions for carrying out an on-line investment analysis of each technology.

The study suggests that setting up a global search engine for finding conservation technology investment information is mostly a technical matter.

Case study: http://ssiapps.sc.egov.usda.gov/EconDocs/Docs/Story1.aspx?filepath=05_Case Studies/00_Introduction.xml&doctype=helpfile

Raw data from within EconDocs: Public Services > Start Search > El Salvador, ... >

Example 2. The Profit Model: Conservation Tillage Analysis: The USDA, Natural Resources Conservation Services was once named the “Soil Conservation Service” -reflecting its roots in conserving soil during the 1930’s dust bowl in the United States. This case study focuses on one of the basic businesses of agricultural conservation agencies –conserving soil by promoting conservation tillage technologies.

The study suggests that setting up a web service for incorporating professional agricultural technology data into applications, models, gizmos, and machines, is mostly a technical matter.

Case study: http://ssiapps.sc.egov.usda.gov/EconDocs/Docs/Story1.aspx?filepath=05_Case%20Studi es/04_Conservation%20Tillage%20Iowa/00_Introduction.xml&doctype=helpfile

Raw data from within EconDocs: Custom Services > Start Search > USDA-ARS, Southwest Watershed Research Center >

Sample References

Example of conservation practice standards:

USDA, NRCS. 2006. National Conservation Practice Standards - NHCP http://www.nrcs.usda.gov/technical/Standards/nhcp.html

Example of economic technology (i.e. budget) standards:

Hallam, A. & Eidman, V. E. & Morehart, M. & Klonsky, K. & editors, 1999. " Costs and Returns Estimation Handbook: A Report of the AAEA Task Force on Commodity Costs and Returns," Staff General Research Papers 1315, Iowa State University, Department of Economics. http://www.economics.nrcs.usda.gov/care/Aaea

Examples of technology classification systems:

Charette, Robert P., Harold E. Marshall. 1999. UNIFORMAT II Elemental Classification for Building Specifications, Cost Estimating, and Cost Analysis. U.S. Department of Commerce, Technology Administration, National Institute of Standards and Technology. NISTIR 6389. http://www.bfrl.nist.gov/oae/publications/nistirs/6389.pdf

American Society of Agricultural Engineers, EP291.3, Feb. 2003. Technology and Definitions for Soil Tillage and Soil-Tool Relationships.

USDA, NRCS. 2004. The EconDoc Exchange (EconDocs). Help File 3D.1 Agriculture, Conservation data standards overview http://ssiapps.sc.egov.usda.gov/EconDocs/Docs/Story1.aspx?filepath=03_Economics%20 Services/E_Standards/01_Agriculture,%20Conservation.xml&doctype=helpfile

Example of economics technology analyses:

USDA, NRCS. 2006. The EconDoc Exchange (EconDocs). The EconDoc Exchange (EconDocs) enables guides and guests to build, edit, store, analyze, and exchange economics documents. It also enables these customers' machines to directly access the documents. http://ssiapps.sc.egov.usda.gov/EconDocs/Default.aspx

Example of economics technology background science and models:

Gardner, Bruce L., and Gordon C. Rausser (editors). 2001. Handbook of Agricultural Economics. Volume 1A. Agricultural Production. Elsevier, New York

Carlson, Gerald A., David Zilberman, and John Miranowski (editors). 1993. Agricultural and Environmental Resource Economics. Oxford University Press, New York