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Re-evaluating Land Use Choices Incorporating Carbon

Value

8.1 Introduction

In the previous chapter, the optimal rotation age of plantations was determined by incorporating traditional tangible benefits and greenhouse gas values into the estimations. Other land use systems also need to include greenhouse gases for full comparison. In this chapter, the costs and benefits of a peanut-maize rotation crop (cultivation) and pasture are assessed by incorporating greenhouse gases and traditional tangible benefits. The optimal rotation of plantations was found to be 34 years (chapter 7), and thus the cost-benefit analysis of cropping and pasture has been extended to 34 years for meaningful comparison with plantations. The greenhouse gas data for these analyses are assessed from previous chapters.

This chapter is divided into six sections. In the first section (8.2), the net present values (NPVs) from traditional tangible products and greenhouse gases are estimated. After that, the NPV over 34 years from all those sources and their sensitivity with different key-parameters are analysed. In the second section (8.3), similar analyses are done for the pasture system. In the third section (8.4), the cultivation and pasture NPVs are compared. In the fourth section (8.5), the NPV from plantations (from previous chapter) is compared with the NPVs from cultivation and pasture. In the final two sections discussions and conclusions are given.

8.2 Cost benefit analysis for peanut-maize cropping system

It has been already discussed that peanuts remove large quantities of nutrients from soils. Therefore, a balanced rotation of legume and cereals is needed to sustain fertility, as cereals help to break soil borne disease, return some organic matter to the soil and help to protect soil from erosion (DPI&F, 2004). In the research site, for this reason, peanuts are alternatively grown with a maize crop. As both are summer crops, the land will usually remain fallow for around seven months every year. In this section, the costs and benefits data, gross margin, and breakeven yields and prices of each crop are discussed first. After that, the NPV of net benefit from both

crops and greenhouse gas are examined. Finally, sensitivity analysis is done for different parameters, and those parameters are ranked based on their sensitivity index.

8.2.1 Cost and income from peanuts cropping

The detailed cost-benefit and gross margin data for peanuts is given in Annex Table H-1. Peanuts need relatively intensive cultivation, and multiple operations associated with plantings and harvesting. The total cost of peanuts production from cultivation to final selling is around $865 ha-1. The major cost (31%) is for harvesting, drying and marketing operations. A significant part of that cost (9.3% out of 31%) is incurred for the threshing/cleaning operation, which is followed by digging (5.7% out of 31%). The purchase of seed is the second largest source of cost (around 20% of the total cost).

Planting and spraying, and fertiliser costs are the third largest sources of costs, each account for around 13% of the total cost. The planting and spraying includes slashing, sprayings four times and six different types of cultivation, with deep ripping incurring a major cost (2.3% out of 13%). Fertiliser includes lime, CK1 and muriate of potash (KCl). Lime is a source of calcium which is vital for neutralisation of acidity problem and peanut kernels. The CK1 is the main source of phosphorus (14.4%), potassium (14.2%) and calcium (10.7%). Among the fertilisers, CK1 incurs a major cost (6.4% out of 13%). The fertilisers’ cost depends on the fertiliser type, the amount used in the previous crop and the residues management practices. Since a large amount of nitrogen fertiliser is used in maize crops (see next section), it is not used in the subsequent peanut crop. Some nutrients are also exported through the sale of peanut hay made from post harvest residue. This practice might have resulted in the higher fertiliser cost in peanut-maize cropping.

Herbicides, insecticides and fungicides are the fourth largest sources of cost, which incur around 12.6% of the total cost. The majority of that cost goes for fungicides (7.93%) and herbicides (4.64%). Finally, weed chipping is responsible for around 9.2% ($80 ha-1) of the total cost.

There are only two sources of income, peanut hay and peanuts. It is assumed that on average, approximately 0.5 tonnes (effective weight) of peanut hay is sold in every

year. With the selling price of $150 t-1, around $75 ha-1 is earned every year from hay. The average of long-term peanut production is 2 t and selling price is $600 t-1. Therefore, of the total income of $1275(ha-1), more than 94% is accounted for by peanuts and around 6% from peanut hay.

8.2.2 Gross margin and breakeven points of peanut

As discussed before, the total cost of peanut cropping is around $865 (ha-1) and the total income is $1275 (ha-1). Therefore, the gross margin of a single peanut crop is around $410 (ha-1). This gross margin is on the basis of given costs and benefits, site conditions and cultivation practices. Even within this boundary, there are two major variables (yield and price) that could fluctuate to some extent every year. The effect of changing yield and price of peanut on gross margin is shown in Table 8.1.

Table 8.1 Effect of yield and price of peanut on gross margin per hectare

Yield Price ($ t-1₎ t ha-1 _{$570 t}-1 _{$580 t}-1 _{$590 t}-1 _{$600 t}-1 _{$610 t}-1 _{$620 t}-1 _{$630 t}-1 1.00 -$116 -$106 -$96 -$86 -$76 -$66 -$56 1.50 $117 $132 $147 $162 $177 $192 $207 2.00 $350 $370 $390 $410 $430 $450 $470 2.50 $583 $608 $633 $658 $683 $708 $733 3.00 $819 $849 $879 $909 $939 $969 $999

Change in peanut yield does not change most of the costs, as many activities are not related to yield. It will only affect the threshing, drying and freighting costs. Therefore, the gross margin is not proportionate to yield. If the yield is one tonne (ha-

1_{), the gross margin will be positive only when the price exceeds $686 t}-1_{. However,}

1.5 t yields generate positive gross margin even at the price level of $500 t-1. If the price is $630 t-1, the gross margin will be around $470 ha-1 even at the same yield of 2 t. Higher price and higher yield are most favourable conditions for higher gross margin. In the study areas, two tonnes yield and $600 t-1 price are long-term averages. The landholders say the price and yield reached $630 t-1 and 2.2 t ha-1 only once or twice in more than 20 years. Higher production usually increases the supply of peanuts, which in turn will reduce the demand and the price level.

In general, the breakeven point (BEP) of yield is the yield at which gross margin becomes zero in a given price. In this case, it was estimated by dividing the

difference of total variable cost and bale income by the peanut price {($865- $75)/$600 t-1 = 1.31 t}. The calculation shows that the yield of 1.31 t (ha-1) would generate zero gross margins for a given price of $600 t-1. The BEP of price is the price at which the gross margin equals zero in a given yield. It was calculated by dividing the difference of total variable cost and bale income by peanut yield {($865- 75)/$2 t-1 = $395 t-1}. This means, for a given yield of two tonnes, even if farmers get a low price of $395 t-1, they will not be in loss. Any prices after this price would be profitable.

8.2.3 Cost and income from maize cropping

All sources and their respective costs and benefits of maize cropping are given in Annex Table H-2. The total cost of maize cropping is around $472 ha-1, which is almost 46% lower than for peanut cropping. Unlike peanuts, maize does not need intensive cultivation. There are only four cultivation operations, with no need for deep ripping. The cultivation for planting and spraying activities costs $73 ha-1 compared to $113 ha-1 for peanuts.

The highest cost in maize cropping comes from fertilisers. As discussed in earlier chapters a large amount of nutrients are removed with peanuts and hay. These removals are partly compensated for by fertilisers in maize cropping. Four different types of fertiliser have been used, which incurred around 35% of the total cost. Among them diammonium phosphate (DAP) accounts for around 12.7%, muriate of potash accounts for 8.7%, lime accounts for 6.9% and urea accounts for 6.4%. The DAP is the most popular source of phosphorus, as it contains around 46% of phosphorus (around 18% of nitrogen). Similarly, urea is mainly used for nitrogen, which contains more than 46% of the nitrogen.

Herbicides are another major cost. They account for around 15.4% of the total cost. Among them, Kamba 500 alone is responsible for around 7% of costs, which is followed by Roundup CT (3.4%), Express (2.5%), Amicide 500 (1.5%) and Surpass (1%). The total herbicides cost for maize ($73 ha-1) is much higher than the total herbicides cost in peanuts ($40 ha-1). In maize cropping, there is no chipping. In peanuts, part of the herbicide cost is a trade-off by chipping. Seed is the third largest source of cost, which accounts for 13.8% of the total costs. Harvesting and freighting operations cost around 13.2% and 7.4% of the total cost, respectively.

In the study areas, the long-term average of maize production is around 3.5 t ha-1. With the market price of $160 t-1, the average total income from maize would be around $560 ha-1.

8.2.4 Gross margin and breakeven points of maize

The estimation shows that the total cost of maize cropping is around $472 (ha-1) and total income is $560 (ha-1). Hence, the average gross margin of maize cropping is around $88 (ha-1). This gross margin of maize is estimated on the basis of long-term average yield of 3.5 t ha-1 and price of $160 t-1. The effect of changing yield and price on gross margin is shown in Table 8.2.

As with peanuts, fluctuations in maize yield do not reduce most of the costs and will only affect the freighting costs. If the yield is 2.5 t (ha-1), gross margin will be negative, even at the price of $185 t-1. After that price level, gross margin will always be positive. About 3.75 t ha-1 yields generate positive gross margin even at the price of $125 t-1. If the price reduces to $130 t-1, the current production level of 3.5 t ha-1 will no longer be profitable. However, if the price increases to $185 t-1, the current gross margin will be doubled.

Table 8.2 Effect of yield and price of maize on gross margin per hectare

Yield Price ($ t-1₎ t ha-1 _{$130 t}-1 _{$140 t}-1 _{$150 t}-1 _{$160 t}-1 _{$170 t}-1 _{$180 t}-1 _{$190 t}-1 2.50 -$137 -$112 -$87 -$62 -$37 -$12 $13 3.00 -$77 -$47 -$17 $13 $43 $73 $103 3.50 -$17 $18 $53 $88 $123 $158 $193 4.00 $43 $83 $123 $163 $203 $243 $283 4.50 $103 $148 $193 $238 $283 $328 $373

The breakeven point (BEP) of maize yield is around 2.95 t ha-1. Similarly, the BEP of price is around $135 t-1. For the given maize yield of 3.5 t ha-1, any prices above $113 t-1 would be profitable.

8.2.5 Net present value of peanut-maize cropping incorporating carbon value

The major goal of this research was to compare peanut-maize cropping, pasture and spotted gum plantation incorporating both traditional tangible benefits and carbon value. Analysis from the previous chapter shows that the optimal rotation age of

spotted gum is 34 years. Therefore, in order to estimate the NPV from maize and peanuts, all marginal benefits of 34 years need to be discounted to the present year with the discount rate of 6%, the same as that of plantation and pasture.

Earlier sections of this chapter show that there is a big difference in gross margin between maize and peanuts cropping ($88 ha-1 vs $410 ha-1). If we take peanuts- maize-peanuts and so on as a sequence of crops, the higher gross margin of peanuts will be discounted less being counted in year one and so on. The opposite bias would occur, if we sequence in an alternative way. Only from the first two years, the NPV from the first sequence and the second sequence would be around $465 and $448, respectively. This difference of $17 NPV over two years is quite significant. The discounted amount of gross margin would be lower and lower over time and the difference would be diluted. However, only because of this mathematical bias, the difference in NPV from the first and the second cropping sequences in 34 years would be around $135 ha-1 ($3646 ha-1 Vs $3511 ha-1). Therefore, the average value of gross margin of both crops is used, which is around $249 ha-1 (Annex Table H-3). With the discount rate of 6%, the NPV of the peanuts-maize cropping is around $3579 ha-1 in 34 years. This is equal to the average value of two different sequences {($3646 + $3511)/2}. This process is also justified because some fertilisers are overused in maize for the benefit of the subsequent peanut crop.

The emissions of greenhouse gases from different sources have been modelled in chapter 4 & 5. Their amount in each year has been given in Annex Table H-3. Since the plantation started in 2001, the reference year for the cropping is assumed to be 2001. The RothC model (chapter 4) shows that the soil carbon amount in 2000 was around 75.46 t ha-1. This amount would have reduced by 1.23 t in 2001. The model shows that the decreasing trend will continue but the rate will decrease over time. By 2035, the soil carbon level would reduce to around 48.5 t ha-1. The amount of soil carbon loss, in terms of CO2e, in an individual year is given in the Annex Table H-3.

The annual average of greenhouse gas emissions from primary farm inputs is 1.05 tCO2e. Similarly, annual greenhouse gas emission amounts from general land use,

soil disturbances and biologically fixed nitrogen is around 1.5 tCO2e. The discount

rate, carbon price and carbon payment method used in plantation are also used here. From the analysis, the cultivation was found to be a net source of greenhouse gases,