Executive Summary of the PMT

A Scenario Analysis of the Potential Costs of Implementing the

Phosphorus Management Tool on the Eastern Shore of Maryland

Executive Summary

Introduction

The Chesapeake Bay is a vast economic engine for a multi-state region supporting high property values, a vibrant seafood industry and fisheries sector, recreational boating and other tourism, among other economic activities.  While the cleanup of the Bay is progressing, there are soils in some parts of Maryland that are saturated with Phosphorus.  The Maryland Department of Agriculture (MDA) is proposing the use of a Phosphorus Management Tool (PMT) to better determine where these soils are and whether additional Phosphorus can be applied. 

Agriculture is an economic activity sector representing over $8 Billion for the economy of the State of Maryland, supporting over 45,000 jobs.  Many of the stakeholders from the agriculture sector are concerned that the rapid implementation of the PMT will create a significant economic burden that could put some of them out of business.  Estimates of the potential costs associated with the proposed implementation of the PMT using three possible scenarios are presented in this public policy briefing document.

The Phosphorus Management Tool (PMT)

As explained in a 2013 University of Maryland Extension Bulletin, the PMT seeks to include new science relative to site and source factors and highlight management decisions more accurately targeted to reduce phosphorus losses from agricultural landscapes.  The overall objective is to identify critical areas where there is a high P loss potential due to both a high transport potential and a large source of P, and also to encourage the use of management practices in those critical source areas that protect water quality. 

The Project 

The information gathering process, and the inputs from the MDA, EPA, and two stakeholder advisory panels, yielded over 4,500 pages of documents, reports, correspondence, opinions, and other source material that were used in designing this project.  Since there was no historical or pilot study data available, a series of viable value ranges for each cost variable were created based on the input from the advisory panels and the review of the resource documents, reports, correspondence, opinions, and other source material.    These ranges were adjusted to the specifics of each of the three scenarios provided and each scenario was converted into a simulation model based on two standalone (MACRO and MICRO) frameworks.

With the MACRO-Level framework, the broader costs impacts were examined.  The variables examined included agriculture, land values, recreation, water-based commerce, as well as infrastructure costs, and community costs, among others.  With the MICRO-Level framework, only farm level variables were examined.  These include storage and transportation costs, synthetic fertilizer purchase costs, changes to land values, changes to production costs and associated revenues, etc.  This MICRO-Level framework was used to develop a prototype PMT Regulation Implementation Analysis Dashboard Template for future use.  Once a final PMT implementation scenario is determined by the Maryland Department of Agriculture, the template will be updated and a fully functional dashboard that reflects the actual scenario chosen will be activated. 

The Three Scenarios

The three potential PMT implementation scenarios studied were provided by MDA.   Cost and subsidy assumptions used in the scenario analysis were based on input provided by MDA, the advisory panels, and the information gleaned from the documents and reports submitted by stakeholders.  Additional input from the Environmental Protection Agency, Delmarva Poultry Industries, Inc., and other sources was also incorporated.  The three scenarios examined are not forecasts.  They simply represent the range of possible outcomes for each of the three different phase-in timelines under different subsidy assumptions. 

Scenario 1 uses a two-year implementation schedule.  In year 1 (2016), Nutrient Management Plans will be developed using both the existing PSI and the proposed PMT.   Under this scenario, starting with Year 2 (2017), no P will be applied to lands with a PMT Risk Score of 100 or greater.   To offset the cost of transportation for manure/poultry litter that will be required to be relocated and used in accordance with PMT; this scenario provides a total of $1,464,000 a year in subsidies for manure transportation and $1,465,000 a year in subsidies once implementation begins (Year 2) for Nutrient Management Plan Revisions reflecting current levels of program support.

Scenario 2 is a variant of Scenario 1 where the only difference is the replacement of the activities of Year 2 in Scenario 1 with a two-year phase-in.   Under this scenario, more time is available for the development of the storage and transportation infrastructure, and some P application is still allowed in the first of the two years of phase-in.  The annual subsidy amounts used for scenario 1 remain unchanged. 

Scenario 3 uses a six-year implementation schedule.  In addition, this scenario provides additional subsidies, incentives, and investments, including some capital expenditures for infrastructure development. 

In Phase I of this scenario, the interim period between formal adoption of the new regulation and the commencement of implementation by farmers (February 2015 through November 2016), Nutrient Management Plans will be developed using both existing PSI and the proposed PMT.  During this time, information on changes in management and volumes of acres/manure affected will be collected to further inform the development of MDA programmatic strategies.   In Phase II, a multi-(5) year tiered implementation schedule will commence. Tiers and management requirements will be based on soil phosphorus levels (FIV) and agronomic crop need for P. These levels will be determined so that affected acres can be brought under the PMT regime incrementally in an effort to minimize disruption of markets related to manure. Tiers for PMT phase-in will be based on soil phosphorus levels (FIV), and may begin at some level above existing level of 150 FIV as determined by MDA. For example, in year one, the tier with the highest FIV level would begin a three-year transition to the PMT.  In year two, the second tier begins, ending in year four. In year three, the lowest FIV tier (150 and greater) begins adoption and at the end of year five, all farms over FIV 150 will be managing in accordance with the PMT.  P/manure applications allowed under resulting PMT risk categories (low/medium/high) will change during the respective transition periods, allowing more flexibility at first but ultimately result in no additional P being applied at the highest PMT risk category when each tier’s implementation is complete.

This scenario also adds programmatic strategies for cost sharing, offsets, and other incentive based approaches, from existing and potential funding sources, to address economic impacts to affected farm operations, valued at about $39 Million between 2016 and 2021.  The additional costs of the enhanced subsidies to the State over 6 years total $15.5 million for this scenario. Some of these costs are one time only or of limited duration and some are annual ongoing. These include tax incentives for manure/litter handling/transportation infrastructure, such as subtraction modification, and an Early Adopters Incentive to offset the costs of commercial fertilizer purchases for implementation in advance of prescribed schedule.  These incentives will be offered for a defined and limited time in the early stages of the five-year implementation timetable. 

In addition there is approximately $40 Million in existing programs available over the same time horizon for alternative use technologies, providing alternative applications for manure/poultry litter.   These new uses would include manure to energy alternatives, as well as alternative uses to land application.  According to the MDA, certain projects under discussion have the potential to utilize from 125,000 to 250,000 tons of litter, beginning in the 2016/2017 horizon.  As some of these alternative uses become a reality, the PMT implementation costs are expected to decline.  Since most of these alternative uses are not currently available, the potential cost reductions attributable to them are not incorporated into the current version of Scenario 3.

Finally, the extended phase-in schedule (six-years) envisaged in Scenario 3 would allow for programmatic adjustments based on new data as implementation progresses.  This time-frame also would allow for any other systemic changes to be taken into account so that implementation variables can be adjusted if necessary.  Since there is currently no data or data estimates for such future events, their impacts have not been incorporated into the current version of Scenario 3.

 

Potential Costs of PMT Implementation

All three scenarios utilized 228,000 tons of chicken litter as the amount to be transported.  The average transportation distance was assumed to be 50 miles and the average transportation cost (comprising loading, transporting, unloading costs and the value of the litter) was assumed to be $28 per ton.  The “Other Costs” variable included average cost of replacement for one ton of chicken litter with inorganic fertilizers at around $60 to $75 dollars.  This figure can be as high as $90 for the farmers who cannot apply any litter to their farms.  The average amount is a result of discounting to account for farms that would receive litter for free and farmers with varying soils. The yield differentials between organic and inorganic fertilizer and different types of crops were also incorporated in this calculation.  The different cost structures of “No-Land” farms (such as added house cleanout costs) were also incorporated into these “Other Cost” calculations (as well as to the subsidy assumptions in Scenario 3).  These assumptions were based on information provided by advisory panel members, the MDA, and the resource documents reviewed. 

To be able to compare the three scenarios, the simulation findings for Scenarios 1 and 2 were extrapolated over the same six-year horizon of Scenario 3.  Based on the simulation results, Scenario 3 has the lowest “Six-Year Subsidized Cost” (farmers’ implementation costs minus subsidies) estimate with a mean value of $22.5 Million ($1.8 Million Standard Deviation) versus a mean value of $30 Million ($0.7 Million Standard Deviation) for Scenario 2, and a mean value of $51.6 Million ($1.4 Million Standard Deviation) for Scenario 1.    

The Cost of Other Sectors Meeting the TDML Goals

The cost of meeting the Chesapeake Clean Water Blueprint goals through actions involving sectors other than agriculture was also examined.  A communiqué from the Chesapeake Bay Commission states that “Maryland must reduce phosphorus by 589,000 lbs. (as of 2010) and must maintain that reduction even with added growth in development and wastewater.”  While these costs are important policy considerations, unless some of the projected savings from not incurring them are applied directly to the mitigation of the costs of implementing the PMT, it is not appropriate to incorporate them into the three Scenarios analyzed in this analysis.

Benefits of PMT Implementation

As discussed earlier, the MACRO Framework was utilized to estimate the costs and benefits of implementing the PMT to the resident of Maryland.  There is ample evidence in the literature proving the economic value of clean water, and in particular, the economic benefits of meeting the Chesapeake Clean Water Blueprint goals for the entire Bay Watershed.   Some of the most detailed and well defined estimates of these benefits can be found in an October 2014 Chesapeake Bay Foundation (CBF) report entitled The Economic Benefits of Cleaning Up the Chesapeake.  According to this report, implementing the Blueprint will lead to $22 Billion in added annual economic value throughout the watershed.  These values are derived from the enhanced natural benefits which include air and water filtering, recreation, seafood and farming production, aesthetics (including enhanced property values), clean drinking water, flood control, and pollution reduction.  While the CBF study concentrates primarily on benefits, its authors estimate that the medium-term costs of implementation are likely to be around $5 Billion annually.  Further, they estimate that, if the Blueprint is not fully implemented, pollution loads will increase and the value of the natural benefits will decline by $5.6 billion annually throughout the watershed. 

The Maryland portion of the value of meeting the Blueprint goals ($4.6 Billion annually) is well documented in the CBF study.  Unfortunately, it is difficult to isolate the portion of those benefits that can be directly attributed to the PMT implementation on the Eastern Shore of Maryland.  Based on a series of assumptions provided by advisory panel members and a review of the available resources, and using the annual value figures from the CBF study, these annual statewide benefits of PMT implementation on the Eastern Shore were estimated to be about $100 Million after full implementation is achieved.  In addition to the natural benefit categories described in the CBF study, this $100 Million estimate includes Maryland based economic activity that could be triggered by spending related to PMT implementation (Please refer to Figures 1 and 2).  

While significant, this statewide MACRO-Level benefit estimate attributable to the implementation of the PMT on the Eastern Shore cannot be directly compared to the farm-level costs of implementation estimated in the three scenarios.  Most of the MACRO-Level benefit estimates involve value enhancements and potential cost savings.  They are not financial resources that can be used to defray the farmers’ PMT implementation costs.  Some stakeholders believe that, given the greater uncertainty of the future benefit estimations, they should be discounted relative to the more predictable farm level costs. 

The Prototype of a MICRO-Level Dashboard Template

A prototype PMT implementation dashboard template was developed.  This template can be used in the future to estimate PMT implementation impacts at the farm-level. 

Study Limitations

Since the actual scenario of PMT Implementation has not yet been determined, the potential PMT implementation cost estimates calculated for this public policy briefing document was based on three specific likely scenarios provided by the Maryland Department Agriculture.  There is no guarantee that any one of these scenarios will actually be the final chosen scenario.  In addition, there are a large number of unknowns and uncertainties with each of the three given scenarios, making the estimates subject to significant variations.

There were different opinions and assumptions as well as a lack of trust among some of the stakeholders providing input for the study.  To accommodate these different assumptions, wider than ideal ranges of probable values for each of the three scenario data nodes were used. 

The three scenarios used in this study, by design, do not address other systemic issues where different stakeholders have differing opinions.  The scenarios simply compare the estimated implementation costs versus the available subsidies for each scenario, independent of these differing systemic assumptions, and for a specific geography—the eastern Shore of Maryland.  While it is important to address these differences in opinion at the public policy level, they remain outside the scope of this project.

The greatest limitation involves the scenario assumptions that pertain to estimating the incremental benefits of PMT implementation at the MACRO-Level.  With all the uncertainties and unknowns previously discussed, determining the viable cost ranges of the PMT implementation that will be borne by farmers on the Eastern Shore is difficult enough.  Determining the portion of the overall economic value of a clean Chesapeake Bay that can be attributed to PMT implementation is significantly more difficult.

Recent reports suggest that the Bay is on target with regards to some of the Bay Blueprint goals.   The October 2014 CBF report, for the first time, quantifies the benefits of reaching the Chesapeake Clean Water Blueprint goals, as well as the costs of not reaching them, taking a very large number of factors into account, covering the entire Bay watershed.  Unfortunately, neither the CBF study nor the other studies reviewed for this study shed any light on how one would isolate the benefit of reducing one of the various pollution factors in a very small portion of the total watershed.  So the question is how and when would property values, commercial fishing, recreational use, etc. increase in a predictable way if 228,000 tons of manure is removed from the nine counties of the Eastern Shore over the next six years? 

It can be assumed that, at a minimum, the removal of the extra P will help maintain the overall economic value of the Bay.  But, estimating the incremental improvements to this value attributable to various reduction levels of Phosphorus levels cannot be easily estimated?  Some simple assumptions were used in this project to estimate such incremental values but these assumptions cannot be fully validated without further data based on actual implementation outcomes.  As a result, this question remains insufficiently answered.  Once MDA determines a final implementation scenario, and a few years’ worth of data is available, this question should be revisited. 

Finally, in a watershed that spans many states, the PMT will apply only to Maryland.  Even though the other states in the watershed will still be responsible for the total amount of P that will reach the Chesapeake Bay, some stakeholders believe the farmers there will not be subjected to the level of scrutiny that Maryland farmers will face.  The Maryland farmers are concerned about the competitive disadvantage this will cause them in a regional commodity market environment.  Since the extent of such production migration and the magnitude of the associated harm are difficult to predict at this point in time, the simulation models for the three scenarios used in this analysis do not include the potential impacts of such economic disadvantages.

Future Economic Data Collection Protocols for PMT Implementation

This project was designed to yield a public policy briefing document.  It was not meant to serve as a comprehensive economic impact study.   The lack of actual implementation data and the wide variations in the assumptions of the different stakeholders about the costs (and benefits) of PMT implementation are serious limitations not only to this current endeavor, but to a future, more comprehensive economic impact study as well.  If, as the PMT is implemented, well designed data collection protocols are established, data on actual implementation costs can be compiled.  With three to five years of actual implementation cost data, a panel of agriculture and environmental economists would be able to conduct a comprehensive economic impact study. Such a comprehensive economic impact study would be far superior to the scenario analysis (with wide ranges of estimated values) used in this document.  Such a study, using an IMPLAN (IMpact analysis for PLANning) economic impact model, would be able to measure both direct and secondary impacts of PMT implementation over time.  Another benefit of such a study would be the incorporation of findings from current and future research on the costs of further reducing P deliveries to the Bay by other means (e.g. buffers, reduced tillage, etc.).   It is also assumed that the potential impact of new technologies, the calibration of the PMT, and other uncertainties will be better known with a few years of actual implementation.  These changing variables might change the cost of PMT implementation by reducing the amount of litter that would have to be transported away from the farms impacted.  Lastly, such a future study could include the costs and benefits of innovation with a higher degree of accuracy.  The effects of such future innovations are difficult to predict.  But, once there is actual data from farmers and other entrepreneurs who might develop other ways to use litter, estimating the PMT implementation cost impacts of their innovations would become easier.