Can crop rotations cure dead zones?

It is now fairly well documented that much of the water quality problems leading to the infamous "dead zone" in the Gulf of Mexico (pictured above) come from fertilizer applications on corn. Fertilizer on corn is probably a big part of similar challenges in the Chesapeake Bay and Great Lakes.

This is a tough problem.  The Pigouvian solution---taxing fertilizer runoff, or possibly just fertilizer---would help.  But we can't forget that fertilizer is the main source of large crop productivity gains over the last 75 years, gains that have fed the world.  It's hard to see how even a large fertilizer tax would much reduce fertilizer applications on any given acre of corn.

However, one way to boost crop yields and reduce fertilizer applications is to rotate crops. Corn-soybean rotations are most ubiquitous, as soybean fixes nitrogen in the soil which reduces need for applications on subsequent corn plantings.  Rotation also reduces pest problems.  The yield boost on both crops is remarkable.  More rotation would means less corn, and less fertilizer applied to remaining corn, at least in comparison to planting corn after corn, which still happens a fair amount.

I've got a new paper (actually, an old but newly revised), coauthored with Mike Livingston of USDA and Yue Zhang, a graduate student at NCSU, that might provide a useful take on this issue.  This paper has taken forever.  We've solved a fairly complex stochastic dynamic model that takes the variability of prices, yields and agronomic benefits of rotation into account. It's calibrated using the autoregressive properties of past prices and experimental plot data.  All of these stochastic/dynamics can matter for rotations. John Rust once told me that Bellman always thought crop rotations would be a great application for his recursive method of solving dynamic problems.

Here's the jist of what we found:

Always rotating, regardless of prices, is close to optimal, even though economically optimal planting may rotate much less frequently.  One implication is that reduced corn monoculture and fertilizer application rates might be implemented with modest incentive payments of $4 per acre or less, and quite possibly less than $1 per acre.

In the past I've been skeptical that even a high fertilizer tax could have much influence on fertilizer use. But given low-cost substitutes like rotation, perhaps it wouldn't cost as much as some think to make substantial improvements in water quality.

Nathan Hendricks and coauthors have a somewhat different approach on the same issue (also see this paper).  It's hard to compare our models, but I gather they are saying roughly similar things.

How farmers, and the environment, could benefit from fertilizer taxes

Some of the worst water quality problems result from nutrient leaching and runoff from agricultural lands.  Nitrogen and phosphorus applied to cropland and not absorbed by crops in the process of photosynthesis will, one way or another, one day or another, end up in the water.  The same goes for animal waste. The nutrients cause algae blooms, reduced concentrations of dissolved oxygen, and diminished fisheries and ecosystem health (called eutrophication). 

While there has been some effort to deal with these problems, I know of no great success stories, and water quality continues to decline in the Mississippi, the Gulf of Mexico, and the Chesapeake, the Great Lakes, and countless other water bodies.

One obvious remedy would be to tax fertilizer.  This would be a nearly Pigouvian solution.  Better would be to tax runoff and leaching directly, but that’s basically impossible for practical reasons.

The obvious but rarely stated problem is that it would probably require an extraordinarily large tax to have any real influence on the quantity of fertilizer used.  And politically powerful farmers would cry foul, which is why this kind of tax will probably never happen.

But I wonder: What would the incidence of a fertilizer tax, broadly applied, really be?  Agriculture is fairly competitive.  And demand for agricultural commodities is nearly vertical—about as inelastic as anything.  The econ 101 analysis would suggest that burden of the tax would fall mainly on consumers.  That is, food commodity prices would go up enough to compensate for most all of the tax.

Now, I’ve seen some economists propose fertilizer taxes on a graduated scale.  If fertilizer is applied at a sufficiently low rate, no tax would be levied, but the tax would then rise sharply with higher application levels (which is where most runoff and leaching comes from).  This would be a little harder to monitor, but probably not too bad.  If done this way, the total tax bill would cost farmers far less, but cause the same reduction in fertilizer use.  And farmers would still get the full compensating price increase, since less output would be collectively produced.

I think it’s possible—indeed, very probable—that the induced rise in commodity prices would more than compensate farmers for the fertilizer taxes they would have to pay under the graduated tax system.  That is, a statutory tax on farmers could cause their profits to go up.

Anyway, I don’t think anyone has made this point or emphasized it very well.  And it’s an important one, at least politically speaking, because maybe farmers could get on board with a tax that actually benefits them.  I’m not sure if it would save the Chesapeake Bay or Great Lakes from eutrophication, but I bet it would do a lot more good than anything else that’s been tried.

Of course, there is no free lunch here: consumers would pay higher prices for food.