ABSTRACT

The Nova Scotia GPI Agriculture Accounts Part Two: Resource Capacity and Use

Food is essential for life. The resources used in agricultural production are also essential for life. Agricultural land, soil, and water resources are the focus of this report. Future reports will focus on other essential resources such as livestock, people, and communities. Our society realizes that we must conserve these resources in order to have vital rural communities and healthy food. But unless we put a dollar value on what these resources are worth, people unfamiliar with farming are unlikely to make the choices needed to keep agriculture, not only economically viable, but thriving for future generations.

Food security has long been recognized as an essential component of national and regional security (Gardner, 1996). In an era of volatile and unpredictable global markets, it is more essential than ever for Nova Scotians to be able to rely on a secure, local source of food and nutrition. Maintaining and enhancing the potential capacity of our agricultural resources is therefore an essential indicator of genuine progress in the Nova Scotia Genuine Progress Index (GPI).

There are six sections to this report: this Introduction; Land Capacity; Soil Quality & Productivity; Input Use Efficiency; Water Capacity & Quality; and The Value of Biodiversity. Each section examines a number of relevant indicators used to assess genuine progress in agriculture. Data on the physical status of each indicator are presented, as well as some preliminary monetary valuations that tell us where we are losing value and where we are gaining it. Valuations of particular investments in conservation are also presented. Not surprisingly, these often constitute a far smaller figure than the cost of 'fixing' or neutralizing damage after it is done, or the cost of replacing valuable resource capacity that has been irreparably damaged.

The indicators and economic valuations presented here will be used at a later time to develop the agricultural component of the Genuine Progress Index.

Any measure of progress must answer the question 'progress towards what?' This question necessarily involves value choices. In the Genuine Progress Index, those values are explicit. For example, there is broad social consensus in favour of livelihood security, peaceful and secure communities, a healthy population, clean air and water, and healthy natural resources. Similarly, the food security of future generations is a fundamental social objective that depends on a healthy farm sector. For this reason, the health and economic viability of agriculture represents a core social value that defines an explicit goal in the GPI against which progress can be assessed. In each section of this report, therefore, the potential goals or thresholds against which progress can be measured will be suggested at the outset.

Some analysts may express discomfort with such values. However, it must be acknowledged that when the Gross Domestic Product (GDP) is commonly used to assess how 'well off' we are as a society, it is also not value-free. When GDP measures are used to assess wellbeing, more consumption and more output are considered 'better' for social wellbeing.

Given that the Genuine Progress Index (GPI) includes social and environmental values and objectives not considered in standard economic growth measures, less may sometimes be better in the GPI. For example, less crime, less sickness, less pollution, less waste, and fewer greenhouse gas emissions are all indications of genuine progress in the GPI. By contrast, burning more fossil fuels and spending more money on crime, sickness, war, and pollution cleanup, make the economy grow and are misleadingly interpreted as signs of progress and prosperity in measures based on the GDP.

In the GPI agriculture accounts, progress is indicated by optimum net gains that account for costs, rather than by maximum gross gains like farm revenues or outputs, as in the GDP. Unlike conventional accounting practices, we also attempt to include uncounted costs and benefits in our determination of net gains (or losses). We also try to incorporate a long time-frame into the analysis of resource use. Genuine progress means optimal levels of quality food production over time with as little waste and pollution as possible, and as much conservation of resources as possible. Net income was the focus of Report #1 on Farm Viability (Scott, 2001). We continue to explore net benefits (or costs) in this report, particularly in the discussion of input and resource use efficiency.

Progress towards thriving and healthy agriculture may require more than just 'sustaining' what we have at this point in time. In agriculture we have the opportunity to 'build' soil and 'enhance' habitat. Producers in the agricultural community who conserve and enhance resources are making a significant social contribution to the common good, to future generations, and to 'genuine progress' in agriculture. Ideally, this contribution will be compensated by long-term production gains as well.

Real progress may also require a shift to preventing resource degradation rather than fixing the problem after losses and damage have occurred. We have attempted to show where preventive investments offer opportunities for long-term savings.

Working towards optimal levels of production and resource use will be the most interesting challenge of this enterprise: the crop requires balanced levels of fertility to grow well, but too much fertility can lead to losses, disease, and environmental damage as surely as too little fertility. The ecosystem with optimal, balanced fertility and nutrient cycling will show vigour, productivity, and resilience in the face of stress. The truly successful farmer will know where these 'optimum' levels lie, whether in the fields of soil fertility, farm work, livestock numbers, or time for leisure. A truly successful society will also be able to discover optimum levels of economic activity that are based on the successful nurturing of the resources on which this activity depends.

In short, 'genuine progress' in the GPI is seen as the product of balance and efficiency rather than of simple gross quantitative growth, as indicated by measures that rely on GDP.

Methods and Framework

There are two components in all the GPI natural resource accounts that are also considered in this report:

1. Physical Account - an assessment of the physical losses or gains associated with the use of a resource. For example, if the average annual soil erosion rate is 3.3 t/ha of cultivated land, and if there are 112,364 ha of cultivated land in the province, we can estimate that 370,801 t of soil per year are being displaced by erosion.
2. Monetary Account - an assessment of the monetary value (market and non-market) of the physical losses or gains. Extending the example above, we may discover that for every tonne of soil displaced there is $35 in market-related losses and $106 in non-market related costs. If 370,801 t of soil are displaced per year, this translates into $52 million per year in losses for the monetary account. This is a hypothetical example, but it illustrates that the monetary accounts are a secondary and derivatory analysis, always based on a prior set of physical accounts.

Our analysis will not be as complete and simple as the example above implies. There is still much data missing, and more time is needed to review and summarize existing data. However, we have attempted to include some of the more important values in the physical and monetary accounts.

With both accounts, there are several levels of analysis. There are values that can be experienced and measured within the boundaries of farms, like soil productivity, and there are societal impacts that exist outside farms, like agricultural run-off to water courses. It is also important to look at short-term and long-term costs and benefits from agriculture. Monetary values are broken down into market values (the value of resources traded on the market) and non-market values (the value of resources not traded on the market; e.g. soil ecosystem services, farm aesthetics, air and water quality, unpaid labour). It is the non-market values that are challenging to determine, but we must make an attempt, otherwise they will be assigned no value in determinations of resource use.

Our analysis attempts to highlight externalities and long-term effects that should be counted. Economists use the term 'externality' for those costs and benefits that are side effects of an economic activity and which are not accounted for in the prices paid by consumers or producers (Pretty et al., 2000). One cause of market failures is that we do not generally account for the externalities associated with an economic activity. Emphasis on short-term (rather than long-term) effects of agriculture has also caused serious market imperfections. Externalities and long-term effects are often not incorporated into the price of farm products (or farm inputs), potentially leading to distorted prices and consumption patterns, and to long-term costs borne on farms and by society. Some of these normally uncounted values are estimated and included in the GPI analysis.

Another essential principle of full-cost, full-benefit accounting used in GPI analyses, is that fixed costs be translated into variable costs whenever possible. For example, the full costs of water used for irrigation should be based on usage, which will, in turn, affect production methods and consumption patterns. Consider the following example: (1) Groundwater is a public good or public natural capital asset; (2) some farmers draw down the aquifer to the point where draw exceeds recharge; (3) governments invest in compensatory water diversion infrastructure; (4) users are then charged for water based on use; (5) the demand for water (and therefore water-demanding production) goes down or (6) the price of irrigated crops or watered livestock should go up. As it stands now, many Nova Scotians use groundwater without directly paying for it, thus providing no incentive for conservation, and potentially producing long-term costs and depletion of a vital natural capital asset. If the water is eventually in short supply or becomes polluted by a small number of users, then we all pay for it to be 'fixed' (a very expensive proposition). Variable cost pricing based on actual usage, and reflecting actual resource values, can help overcome these distortions and encourage more efficient production methods and consumption patterns.

A similar situation exists with other public capital infrastructure. For example, highway capital and maintenance expenditures are currently accounted for in the national and physical accounts as soon as they are spent rather than being depreciated over the useful lifetime of the highway. This allows the accumulation of hidden infrastructure deficits as roads deteriorate. This leads to invisible shifting of costs to future generations and the absence of any effective road tracking system that ensures different classes of vehicles pay their true costs. By contrast, if currently fixed vehicle registration tax and insurance costs varied according to actual vehicle and road usage (number of kilometers driven; weight of the vehicle - quantifiable documentation that is available to public and insurance authorities), then the costs of road maintenance, fossil fuel depletion, air pollution, greenhouse gas emissions, and other 'externalities' would be more effectively incorporated into the prices of items (such as fertilizer, feed, or farm products) that are transported long distances.

Within the matrix, comparisons can also be made. We may present trends over time (e.g. a comparison of the value in 1971 vs. 2001), as well as spatial comparisons (e.g. a comparison of two different fields, or two different provinces). The comparison matrix is shown in Table 2. These comparisons can help explain which production techniques are the most beneficial and efficient for a healthy and vibrant agricultural sector.

We will not be able to fill in all the cells or account for all the blanks in this report. This framework does, however, help to summarize the findings so far, to indicate current data gaps, and to suggest directions for future research.

Within both types of accounts (physical and monetary), there are a number of different measurement methods. Physical accounts can be measured in various ways, some of which will be explained as we move through the discussion. Definitions of units and measurements will be highlighted in text boxes within each section.

Monetary accounts are determined based on standard methods developed in the literature. We have attempted to summarize some of these key methods here. Monetary valuations can be direct or indirect. The examples provided below are phrased as costs, but the same analysis can be applied to benefits. Direct valuations are the most obvious and straightforward monetary analyses. Yields decline by X amount if soil loss is at Y level. Therefore, losses of $Z are incurred as a result of Y soil erosion. However, there are also indirect costs associated with (1) trying to fix or compensate for the soil loss (compensatory valuation) through other means like addition of synthetic fertilizer; (2) trying to prevent soil loss (avoidance valuation); or (3) trying to replace or rebuild the resource once it has been depleted or degraded (restoration valuation). These costs are sometimes called defensive expenditures, because they are designed to prevent or compensate for a decline in wellbeing, rather than signifying an actual improvement in wellbeing. Tables 1 and 2 summarize the definitions and examples of these valuation methods. The examples are based on soil quality indicators for illustration purposes.

Avoidance costs are generally far less expensive than restoration costs. Sometimes avoidance costs are also more economical than compensatory costs. Compensatory measures (e.g. synthetic fertilizer use compensating for loss in soil productivity) may actually exacerbate resource degradation and increase long-term costs. Society can benefit in the long run by implementing avoidance or preventive activities, and rewarding those who already do so. The agricultural sector is fortunate because prevention is still relatively easy and economical. The more degraded a resource becomes, the more expensive prevention, compensation, or restoration will become. Likewise, the more we conserve a resource, the higher direct value the resource has, the fewer defensive measures are necessary, and the better the net productive yield is likely to be. Everybody wins in that situation.

Table 1: Direct Valuation Method

Table 2: Indirect Valuation Methods (Defensive Expenditures)

A fundamental purpose of the GPI full-cost, full-benefit accounting mechanisms is therefore to provide an efficient framework for assessing alternative policy options, by allowing a more accurate and comprehensive valuation of our agricultural resource assets than is possible in current accounting mechanisms. Indeed those conventional accounting mechanisms have too often sent the wrong signals, which have actually encouraged and supported resource degradation and the loss of natural wealth.

It is interesting that in the special case of certified organic agriculture, farmers have taken responsibility for avoidance investments (avoiding damage to the resource), and restoration costs (in some cases restoring depleted or degraded agricultural systems), which is reflected in the higher price charged for organically produced food. Some consumers are willing to pay a premium to have food produced in a way that does not degrade the resource. In Europe, many governments have chosen to pay farmers to convert to organic farming because they recognize that this amplifies positive externalities and minimizes negative externalities (OECD, 1997). The unique case of organic farming will be covered in a separate report. This is not to say that all other farmers do not avoid resource degradation or do not enhance the quality of the environment. Many do. What makes certified organic agriculture unique is that the costs of producing societal benefits are (to some extent) passed on to the consumer or the government, rather than being borne solely by the farmer.

In order to choose meaningful indicators of genuine progress, we must ask which economic, environmental, and social measures accurately indicate 'flourishing' or 'healthy' agriculture. Some of the indicators suggested in this analysis are well established, while others require new ways of measuring the health of the resource. Report sections and indicators for each are listed in Table 3.

Using these indicators, current trends are assessed against proposed minimum objectives, expressed as resource health goals. The sustainability goals proposed here are based as far as possible on thresholds established in the literature. When no established thresholds for sustainability exist, we have chosen goals that are both achievable (i.e. they have been achieved in representative times and places) and/or estimated as necessary for long-term viability. Establishing such goals, of course, is part of the discussion that must take place when proposing new indicators of real progress. The goals proposed here may require adjustment over time as conclusions from new studies and actual experience are incorporated into the analysis.

Table 3: Indicators