Resolved: That the United States should substantially change its federal agricultural policy.

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Source: Resource: Engineering & Technology for a Sustainable World, Dec
1999 v6 i12 p9.

Title: Fertilizer Facts and Fallacies.(Statistical Data Included)
Author: Stephen B. Lovejoy, Chyi Lyi Liang, John G. Lee and Paul Preckel

Full Text COPYRIGHT 1999 American Society of Agricultural Engineers

A tax may do little to improve environmental quality

Hypoxia in the Gulf of Mexico! Eutrophication of Lake X! Fish Kills in the River Y!

Bold headlines such as these emanate from today's popular media, which highlight reports that blame agriculture for water pollution and other environmental woes. The writers' logic leading to this conclusion is that farmers add too much fertilizer to their fields, creating a dangerous overflow. Many suggest that if farmers changed this behavior, the world would be cleaner and safer, and farm costs would be reduced.

However, little is mentioned in these articles about the less-than-perfect correlation between fertilizer use and loadings to surface or ground water. Application timing, spatial location, cropping patterns, soil, slope, weather and structural practices can play equal roles to the quantity of fertilizer applied. But these concerns are mainly overshadowed by the focus on altering the U.S. farmer's behavior.

Although one method of changing behavior is to restrict fertilizer use based on quantity or per-acre limits, some economists and policy analysts recommend taxing the input instead. They believe a tax would encourage farmers to use less fertilizer to avoid paying more out-of-pocket expenses.

This idea may sound feasible, but information is limited on the impacts fertilizer taxes would have on the quantity of fertilizer used, the environment or the U.S. economy.

Comparing alternatives

To encourage behavioral change among farmers, Purdue University agriculture experts have provided various educational programs. They include blitzing the farm press with fertilizer information, one-on-one planning sessions with farm operators and owners, and water quality demonstration projects.

Purdue has also worked toward increasing state and federal efforts by concentrating on these areas using local support and group participation. Specific watersheds, regions and farmers have been targeted for improvement. Tens of millions of cost sharing dollars have been spent on practices such as conservation, land rental and land retirement.

The efforts have been far reaching but the results offered few impacts on behavioral goals.

What else can be done? The response given over the years has been to tax fertilizer. This increase in price, proponents say, would cause farmers to be more judicious and less likely to over fertilize.

To test this theory, former Purdue School of Agriculture student, Chyi-lyi (Kathleen) Liang, examined potential fertilizer tax impacts. Her study focused on:

* how taxes impact fertilizer use and

* how related behavioral shifts and price impacts reverberate throughout the agricultural sector and U.S. economy.

Liang used a multi-regional, multi-sectoral Computable General Equilibrium (CGE) model to estimate impacts. A CGE model analyzes links between markets, industries, government accounts and adjustments made when changes are introduced to an area.

The modeling framework captures changes in price and quantity in each sector for domestic supply and consumption, intermediate use, export and import, and factor -- land, labor and capital -- use. While the framework does not fully allow for input substitution -- such as substituting agricultural machinery for labor -- additional research by Timothy Randhir and John Lee at Purdue found that farmers use few substitutes when prices increase.

When the experimental variable -- fertilizer tax -- is introduced to the model, resources such as labor and capital from the food and feed grain sectors move to the livestock and oilseed sectors. That means farmers produce less food and feed grain but more livestock and oilseed.

The acreage of land in production stays about the same but the amount of commodities produced changes. The rate of this change correlates with the tax rate. The study used various tax rates up to 500 percent for nitrogen and phosphorous. Results show that even with this high tax rate, fertilizer use decreased little -- 3.2 percent.

At lower tax rates, fertilizer use reduction was even lower. At a 100 percent tax rate, nitrogen and phosphorous use fell 0.6 percent. This reduction was smaller than some proponents anticipated, but agricultural economy impacts were substantial.

As fertilizer prices increase, some may use manure more judiciously or alter crop rotations to reduce the need for fertilizers. These practices may lessen some economic impacts on specific farmers and reduce fertilizer use. But the options offer minimal aggregate impacts.

Purdue's research model estimates that at the 500 percent tax rate, food and feed grain prices increased 14 percent. That increase resulted from a 10 percent food grain and 24 percent feed grain production decrease.

The price increases also led to 25 percent to 30 percent less food and feed grain exports, either because foreign buyers could not afford the grain or cheaper suppliers captured the market share.

At the highest tax rate, economic returns to agricultural land and labor fell sharply. This effect induced labor to shift from the agricultural sector and prompted changes in agricultural land use.

[Graphic omitted]While price reductions -- and decreased returns to land and labor -- of 25 percent to 47 percent caused farm income to fall, impacts on the overall U.S. economy were negligible. Higher prices for food grains lead to small impacts on the consumers' food dollar. As a small portion of household expenses, the extra spent would go unnoticed.

The fertilizer tax at its highest level reduced national income 0.1 percent. The tax has little impact because:

* agricultural sectors make relatively small contributions to the overall economy and

* wage rates in agriculture are relatively lower than in other sectors.

The results

Purdue's research shows that taxing fertilizer would have little impact on the overall U.S. economy or the quantity of fertilizer used. However, economic repercussions would be felt by the agricultural industry.

Environmental impacts would likely be small compared to the burdens inflicted on U.S. farmers.

Whether the benefits outweigh the costs is a value judgment that must be made based on the priority of impacts. Purdue's research provides consumers, producers and the government with knowledge about the trade-offs to use for decision making.

Stephen B Lovejoy is a professor of agricultural and environmental policy and associate director of the Natural Resources and Environmental Science Program at Purdue University.

John G. Lee and paul Preckel are professors in the Department of Agricultural Economics. Purdue University, W. Lafayette.

Chyi-lyi (Kathleen) Liang is assistant professor with the Department of Community Development and Applied Economics, The University of Vermont.

 
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