Integrating Soil Resources into Economic Accounting at the Farm Level: A Brief Overview

Pilar Santacoloma

ABSTRACT

Where farm record keeping is used to calculate farm-household income, it commonly considers only financial accounts. Awareness of resource degradation or improvement, however, calls urgently for a better understanding of the interrelations between environmental and socio-economic aspects in decision-making. This paper presents an overview of a methodology aimed at integrating environmental and economic accounts at the farm level. Emphasis is on including natural capital deterioration as part of production costs, with the aim of identifying sustainable farm-household income. The method is based on a nutrient flow balance calculated both in physical and financial terms. Calculations consider nutrient inflows and outflows derived from agricultural practices as well as those derived from natural processes. Data requirements are mainly biophysical conditions, soil deterioration/improvement, farm management and nutrient contents. Preliminary evaluations show the method’s usefulness for valuing efficiency of soil resources and nutrient management, as well as for illustrating the value of environmental assets to decision-makers.

INTRODUCTION

Non-conventional agricultural practices are emerging worldwide as an alternative for confronting problems of natural resource degradation. From an agro-ecological viewpoint, they contribute to, among other things, nutrient restitution, higher productivity and efficient resource use and allocation, (Altieri, 1995; Lampking et. al., 1999). In spite of their technical benefits being recognised, they are little disseminated among farmers. Many reasons might explain this. This paper argues that to be broadly disseminated, these technologies should reveal clearly their advantages in economic value.

Attempting to contribute to a better understanding of these technologies, the paper presents an overview of a methodology aimed at integrating environmental and economic accounts at the farm level. On a broader scale, however, it emphasises basic principles of integrating the value of soil quality changes into economic accounts under specific technologies to estimate sustainable household income.

Following the international agreement known as Agenda 21, the United Nations Statistical Division (UNSD) developed a methodological framework for accounting for natural resources and valuing the changes in them arising from economic growth at the national level (United Nations, Statistical and Social Affairs, 2000). A similar approach for agricultural development at the farm level was, however, left for further operational developments. The Farm Management and Production Economics Service (AGSP) of FAO and The Royal Tropical Institute (KIT), the Netherlands, in collaboration, proposed a methodology to better integrate land degradation into financial and economic accounting of small-farm production systems (Moukoko and van der Pol, 1999).

The following section attempts to summarise relevant theoretical aspects of this methodology, specifying data requirements and processing. The third section illustrates institutional arrangements for implementing the methodology and gives examples of the type of outcomes to be drawn from it. Finally, the last section, as a result of recent evaluations undertaken in compilation sites, discusses the potential usefulness and challenges of applying the methodology.

2. Methodological Aspects

The basic principle of the methodology is to incorporate calculations of natural capital deterioration in production costs in order to identify sustainable farm-household income. Usually the value of the nutrients coming from natural processes is not accounted for even when there is positive soil restoration. It is common to value the output produced from agriculture, but not the decline or increase in the output-generating capacity. Such considerations should be an incentive to farmers to improve, or at least to maintain resource availability and capability, making their livelihoods more sustainable.

Another principle assumed is the substitutability between environment (natural capital) and stocks of man-made capital, which has been called weak sustainability.[1] So, soil fertility deterioration/accumulation can be quantified through nutrient flows and a monetary value given for the nutrient balance in order to express the value of the natural capital consumed/added in the productive process.

How to approach to the methodology?

To calculate soil resource depreciation/appreciation and its impact on farm-household income, the methodology proposes a step-by-step approach. It involves the physical and monetary assessment of nutrient flows. Primarily, natural and man-made processes affecting inflows and outflows of chemical components of cultivated areas should be identified and quantified (Table 1). Natural input processes are considered as important as man-made inflows, especially in low-input agricultural systems (Moukoko and van der Pol, 1999).

Table 1: Scheme of the type of INflows and outflows in the nutrient balance

Nutrients Inflows
(Kg/Ha/Year) / Nutrients Outflows
(Kg/Ha/Year)
Natural Inflows
(Sediments) / Nutrient Uptake
by Harvested Crops
Nitrogen Fixation / Nutrient Uptake
in Residues
Residues Restitution / Losses by Erosion
Man-Made Inflows
(Fertiliser) / Losses through
Leaching

Afterwards, the fraction of chemical components of soil available to plants needs to be identified. Following previous authors, van der Pol in 1992 maintains that chemical elements are present in the soil in three different pools: either available for plants, present in organic matter or as mineral reserves in the soil. Since fluxes (exchanges between the chemical elements available to plants and those in the organic matter) occur in a yearly cycle, they are both considered nutrients. To a great extent they determine the fertility of the soil. It is estimated that over a period of 10-20 years these two processes reach equilibrium. Elements in the mineral reserve or irreversibly fixed are not accounted as nutrients (van der Pol, 1992).

Valuing nutrients in monetary terms

The balance for each component identified as plant nutrient is then calculated and valued, based on current fertiliser market prices. The main assumption here is that those elements available to plants as nutrients can be considered to have an economic value. Nutrient balance per each element can be valued in monetary terms applying the replacement costs. The replacement costs method states that damage to natural resources should be repaired, returning them to their initial state in order to maintain productivity. The nutrient balance for each element can result in depletion or surplus, and is valued equal to the market value of an equivalent amount of fertiliser. Thus, the sum of the nutrient balances for each element per hectare per crop and the market prices of fertiliser are the key aspects of the valuation.

Finally, the sum of all valued nutrients is compared with the conventional farmer income. This value represents a sustainability ratio (SR) which relates the value of nutrient depletion in a production system to the conventional net income (Moukoko, 2001). As an example, if the value of nutrient depletion in a production system would amount to 25% of the conventional net income, the sustainability ratio would be 0.75.

Integrating natural resources depreciation into economic accounting

In this approach, the core of the integration of environmental issues into economic accounts is the inclusion of an allowance for depreciation of natural assets. The value of this depreciation would equate to the resulting value of the nutrient balances in monetary terms[2]. As when applied in the case of physical assets, the depreciation of natural assets implies reserving a fixed allowance to ensure the sustainable use of the services provided by the soil. Three kinds of statements are envisaged to integrate the depreciation of natural assets: the integrated operating statement,the integrated balance sheet and the integrated input-output statement.

The farm income level is represented by the conventional operating statement. Here usually both the value of revenues and cash expenses, and the value of non-cash expenses such as depreciation of buildings and machinery, are recorded. The integrated operating statement adds the value of nutrient balance as a cost called “nutrient substitution” or “allowance for nutrient replacement” (Table 2). In this way, the costs and benefits of the farm business are expressed more accurately, and the performance of the use of all capital resources, both physical and natural (in this case soil), is assessed. As shown in Table 2, the value of the natural capital depreciation was equivalent nearly to a third part of the gross income.

Other indicators resulting from the application of the method are also very useful tools. Among them, to mention but a few, are: i) natural resources contribution index (NRI), representing the relation between mined/added nutrients and the sum of purchased fertiliser plus nutrient provided by nature; ii) added value with respect to nutrients (AVN) which relates the value of all nutrients needed for the production of one crop to the value of the produced crop; and iii) productivity foregone and replacement cost ratio (PRR) which combines cost-benefit analysis and change in productivity methods to relate the value of production which would be lost if the replacement of lost nutrients were not undertaken and the cost which would be actually incurred for the replacement (Moukoko, 2001).

Table 2: Integrated Operating Statement (in US$ for farm model of 3 ha)

Items / Amount US$
Revenues
Sale of products / 480
Other / 120
Total revenues / 600
Cash Expenses
Fertiliser / 70
Seeds / 15
Other / 40
Total cash expenses / 125
Income before depreciation / 475
Non cash expenses - Depreciation allowances
Building and equipment / 80
Net Income before allowance for nutrient replacement / 395
Allowance for nutrient replacement / 150
Net adjusted (sustainable) income / 245

Data and skills needed for implementing the methodology

The method requires information provided by different kinds of sources, as outlined in table 2. Data on biophysical aspects of nutrient flows can be collected from a literature review, whereas data on specific soil characteristics and natural or agricultural deterioration are better gathered from specific studies in the region. More specific information involving farming practices, cropping systems and economic accounting needs to be collected through farmer interviews.

To fulfil accurately the data requirements of the methodology, it is advisable to operate with an interdisciplinary team. Many data from literature reviews and in-situ studies require considerable analysis and interpretation. In order to manage data coming from different disciplines, it is highly advisable to combine the expertise of soil scientists and socio-economists, together with extension agents. Once this information has been analysed, the data entry does not require strong computer knowledge and capabilities. The methodology uses a workbook spreadsheet in Excel designed following the principles enunciated above. Specifications on how to enter the information are contained in the workbook spreadsheet. It can function on any computer with Windows 95/Excel 4 or above. Skill requirements are minimal, although it is important to have some knowledge or experience in using Excel.

Table 3: Data requirements and sources of information

3. Application of the Methodology

To illustrate practical aspects of this methodology, an example is presented from a compilation study being performed in Colombia, to evaluate the usefulness and effectiveness of the method. To undertake this study, national research and extension institutions were selected with the expectation that they will adopt the methodology, and further applications may be envisaged. A multidisciplinary team from the National Corporation for Agricultural Research is in charge of developing the study. The team has been dealing with economic valuation of soil conservation measures and alternative proposals too.

Sites selection

A summary of the most important criteria that were taken into account in the selection of the compilation sites in Colombia were as follows:

The selected areas are representative of national agro-ecological systems in geographical and biophysical terms (e.g. Colombia, Andean eco-systems with high slope and strong soil deterioration)

Smallholders or small-scale farmers are the predominant farming system within the agro-ecological region.

Erosion and soil depletion problems have been identified as very important constraints for sustainable agriculture and farm families’ livelihoods.

Better natural resource management has been designed and partly implemented in the area by government or private initiatives.

Type of Outcomes

Examples of the outcomes produced by using the methodology are, first, nutrient flows at the crop level for the most important elements (N, P, K, Ca, Mg, and S). These are calculated in physical terms (nutrient inflow and outflow structures) and monetary terms (valued nutrient inflow and outflow accounts). An aggregated value of these outcomes per crop and per rotation system can be obtained. Finally, the results of the nutrient balance at the farm level can be summarised. This information alone offers relevant insights about nutrient and soil management and permits decisions to be taken regarding crop selection and soil management.

Preliminary results from calculations on a rotation system in Santander, Colombia illustrate the type of outcome that can be obtained (Figure 1). To interpret the results, it is worth noting that the upper and the lower part of the pie chart each represent 100 percent of the inflow and outflow structure. The inflow structure (upper) may give an indication of the relative importance of fertilisation in the maintenance of soil fertility and, thus, the degree to which the production system is dependent on natural or agricultural processes. The outflow structure may give an indication of the efficiency of the cropping system, comparing the value of all nutrients needed for crop production with the value of nutrients taken up by the harvested product. Also it may give an indication of the value of mined nutrients and the relative importance, within the avoidable losses, of preventing mining by implementing loss-reduction measures.

According to the results, this production system presents a deficit of nearly 18 percent in the nutrient balance. This might be explained mainly by nutrient losses due to erosion and, to a minor degree, by leaching. On the other side, residue restitution plays the most important role acting as the main mechanism of nutrient redeposition. Although very preliminary, the results give an indication of the extent of soil mining associated with the production process as well as about a better mechanism to overcome the negative balance.


Figure 1: Example of valued nutrient flow in monetary terms at the farm level, Samaga watershed, Santander, Colombia, 2001.

4. Envisaged usefulness of the methodology and challenges in its application

Although in a very preliminary stage, the pilot compilation cases provide already some insights on the usefulness and constraints of the methodology. The views from stakeholders in the pilot cases are summarised as follows:

Usefulness

To value efficiency and productivity in soil resources management and farming systems: Analysing nutrient balance may provide useful insights to assess nutrient and soil fertility management with implications for farming system efficiency. Negative balances, as in the Colombian case, imply that the farming system is producing crops and livestock by consuming the natural fertility, which most likely implies further output decreases. Otherwise, the nutrient balance may be positive, indicating accumulation of capital. However, a careful interpretation of the last result is needed. So, should a positive nutrient balance be accompanied by high nutrient losses due to erosion and/or leaching, they may indicate low efficiency in nutrient management with high fertiliser costs and contamination problems.

To encourage farmers to adopt soil conservation and best agricultural practices: Field and on-farm experiments on conservation technologies usually present higher productivity compared with conventional ones. Using the methodology, the added value in terms of nutrients that each technology offers can be shown in monetary terms. The results may serve to raise farmers’ awareness about the potential for resource intensification using better agricultural practices.

To illustrate the value of environmental assets to decision-makers and politicians: the quantification of outcomes may help to raise politicians’ awareness of the value of environmental assets usually not visible from financial accounting alone. Policy-makers and decision-makers could find support to justify projects for improved nutrient management, soil conservation practices and best agriculture practices.

Challenges

Organic matter valuation: the methodology has not yet developed ways of valuing the role that organic matter plays in the soil, for example,in forming soil structure.

Water valuation: at the moment, the methodology does not value water as a natural capital asset at the farm level To incorporate intrinsic water value at the farm level would entail an enormous amount of research and might be part of future activities for AGSP-KIT.

Scaling up the results: integrating environment factors into economic accounts at regional or national levels should be done, integrating other instruments such as geographical information and modelling. Resources for this, however, are not yet available.

Conclusions

Integrating environmental and economic accounts offers a unique opportunity to appraise sustainable income at the farm level as well as to measure financial contributions of environmental friendly technologies. The data and skills needed rely more on interdisciplinary work to analyse and complement the information available. Preliminary results from compilation sites show the usefulness of applying the methodology in this paper for both introducing improved land management technologies and assessing performance of farm resource efficiency.

Bibliography cited

Altieri M. (1995). Agroecology. The science of sustainable agriculture. 2nd edition. Westview Press.

Lampking N, Foster C, Padel S and Midmore P. (1999). The policy and regulatory environment for organic farming in Europe. Organic farming in Europe: Economics and Policy Vol. 1

Moukoko-Ndoumbe F, (2001). Integrated Economic and Environmental Accounting. Discussion paper presented at the International Workshop on Nutrient Balances for Sustainable Production and Natural Resource Management in Southeast Asia. 20-23 of February 2001. Farm Management and Production Economics Service (AGSP), Food and Agriculture Organization of the United Nations (FAO).