Liquid assets can easily erode away. Millions of Americans who had retirement funds invested on Wall Street saw the value of their stocks and bonds decline and threaten their future. A grain bin full of stored corn can rapidly drop in value after the market peaks and a farmer does not want to take any less for it than what it might have been worth weeks or months earlier. But the monetary value has eroded and may not reach that point again for some time to come.
Even a non-liquid asset can erode, literally and that means the value of farmland declines with erosion.
The Soil Conservation Service was initiated during the Dust Bowl years to help slow the wind erosion of valuable farmland. It expanded to water erosion, techniques and practices became more complex, and by the time SCS became the Natural Resources Conservation Service (NRCS) the level of erosion was becoming significantly reduced.
Iowa State University economist Mike Duffy says from 1982 to 2007 the erosion rate for the entire US had dropped from 4.0 to 2.7 tons per acre of cropland. Looking at the monetary impact of soil erosion, Duffy says it is a cost to the farm operator in terms of lost fertilizer and soil carbon, and it is a cost to society in terms of clogged ditches, increased water turbidity, and increased siltation in areas where it will have to be dredged at taxpayer expense.
But Duffy says the third impact is that of a cost to the landowner by a decrease in asset value. While many farms are operated by the owner, an increasing number are not, and absentee owners may or may not be aware of the erosion of their asset value. Research has attempted to quantify the value, and it currently ranged from about $14 per acre to well over $45 per acre. NRCS reports that each ton of eroded soil contained the equivalent of 2.32 lbs. of nitrogen and 1 lb. of phosphorus, equal to $1.77 per ton of soil loss in 2011. In terms of value that was retained, NRCS says the EQIP program reduced soil erosion by 8.6 tons per acre, for a value of $15.22 per acre saved. Keeping that amount of soil out of surface water means a savings of $42.40 in money not spent for dredging and filtration. On a per ton basis, societal benefits total $6.70 per ton of soil retained in a field and prevented from eroding.
Duffy says the crop losses due to soil erosion cost both the farm operator and the land owner because the value of the land is determined by its productivity. In attempting to establish a value, Duffy sampled soil types, slopes, and erosion measurements, in addition to estimated corn yields, soybean yields, and the corn suitability rating. While all of the samples were taken across 20 Iowa counties, the process could be applied anywhere.
But how were land value changes established to compare with erosion? Duffy says, “Three alternative methods were used to evaluate the cost of degrading a soil from one erosion phase to another:
- Change in land value due to reduced CSR rating;
- Change in land value due to loss of yield potential; and
- Change in land rent value due to the change in soil erosion phase.”
Of the 20 counties surveyed, Duffy reported an average $285 loss on revenue per acre based on the lower corn suitability rating. The estimated annual loss in land value per acre due to erosion was placed at $8 for a continuous corn cropping plan and a $9 value for a corn-soybean rotation. And based on the land rent survey, the overall value of land per acre dropped about $11 per bushel of corn or soybeans produced due to erosion issues.
While Duffy says all of the estimates are fairly close to each other, major differences can be explained. But he rhetorically asks if it matters? He says, “In other words, will erosion loss show up in the sale price of the land, or will the erosion loss simply be a part of the overall price per acre because it is too difficult to separate the eroded and non-eroded land in a sale?Obviously that would depend upon the particular piece of land. But, in some cases (especially in highly erodible counties) if one farmed in such a manner as to prevent erosion the soil would have an increased value.”
Citing an Iowa survey that indicated 26 percent of land owners say their farm is a long term investment, and 22 percent indicate it is a family farming operation, Duffy says, “Protecting the soil from erosion will protect the value of the investment, whether it is for a long term financial gain or a family inheritance.”
Calculating the average cost of erosion, and using USDA’s estimates of losses, Duffy says the average soil loss value is $3.48 per acre per year; and while that may not be great, it is measurable and will have an impact over time.
Farmland is an investment like any other and the value can erode over time, even in a literal sense. The actual cost can be calculated, whether it is in terms of yield loss, crop suitability, or reduced rent potential. Such costs to land owners are in addition to societal losses, such as clogged ditches, silted water reservoirs, and other taxpayer liabilities. Land owners can calculate their cost of erosion and realize asset values can decline with the loss of soil.
Source: FarmGate blog