Combining Conservation and Profitability
 

Remarks by Bruce I. Knight, Chief,
Natural Resources Conservation Service

at the Farm Journal Forum
Washington, DC
December 4, 2002

Thank you, Sonja (Hilgren). It is always a pleasure to be with you and see a fellow South Dakotan who has made good. It’s an honor to be here this afternoon and to share this session with my old friend Craig Cox and two leaders of the agriculture community like Charlie Arnot, who I just met this week, and a long-time friend, Roy Bardole.

As you heard, our topic this afternoon is “The new environmental agenda for crop and livestock producers.” Six months ago, that topic would have caused me to talk about the new farm bill. After all, the farm bill represents the single greatest investment in conservation on private lands in our nation’s history. It provides $13 billion for conservation over the next six years, and it emphasizes conservation on working lands. It gives farmers and ranchers a wide range of opportunities to conserve our natural resources in the context of making a profit.

So, in a very real way, the new farm bill does set the agenda for conservation in agriculture for the next few years. But, I sense from the agenda of this forum that I should be looking beyond the immediate impact of the new farm bill and talking about what is coming next.

The issues facing crop and livestock producers are getting more complex every day. Farmers know very well that forces outside the farm gate can often have greater impacts on a farm than what happens within the field. External forces affect farmers and ranchers both in terms of production variables and in terms of the environment. And all of us in the business of agriculture have seen that these two types of external forces – those involving production and those involving the environment – often act in opposite directions, squeezing profitability in the middle.

On the one hand, economic forces are driving us toward consolidation of production in many parts of the agricultural industry. Economies of scale make consolidation a reality for the mass market, and frequently force smaller producers to look for niche markets and new products to remain profitable.

On the other hand, citizens in the United States and other developed nations have rising expectations regarding the environment. Businesses that fail to clean up their act face increased regulation – which usually means increased expenses and less profit.

Regulation can have other effects, including causing production to move from state to state, region to region, and even nation to nation to control costs and improve profitability. We live in a global economy, and the fact is you can grow corn or rice, cows or sows, lots of places in the world, not just in the United States. When production moves out of the country, we lose on many fronts. Obviously, we lose jobs and profits in this country, but we also lose any control we might have over the environmental issues that concern us. The best solution all around is to create incentives that allow agriculture to produce food and fiber and environmental benefits in this country, rather than forcing production overseas.

And that is what I see as the future environmental agenda for agriculture. By creating a market place or trading environmental goods and services, we will enable producers to do more for the environment.

The concept of trading environmental credits is not new. The Environmental Protection Agency has been working for many years to implement this concept in several areas, with great success. Air emissions trading also has been used to protect visibility, and prevent emission of volatile organic compounds and hazardous air pollutants.

The effort to protect wetlands through mitigation banking is one of the oldest forms of environmental credit trading. The Departments of Defense, Interior, Agriculture, and Commerce joined with EPA a number of years ago to formulate guidelines for wetlands mitigation banking. Water quality trading has been used to limit effluents and air quality trading to prevent acid rain. EPA is studying the concept of trading credits with regard to TMDLs. In recent years, we have seen mitigation banking extended to endangered species in the States – for butterflies in California and woodpeckers in North Carolina. There are other habitat mitigation projects under study.

We can expect to see more trading of environmental credits in all these areas, as well as in the emerging area of greenhouse gasses and carbon sequestration.


The New Environmental Agenda

What I want to do today, in the few minutes I have, is to talk about environmental credits as the new environmental agenda for agriculture – and to convince you that trading in environmental credits gives us ways to be more profitable while retaining high productivity and improving environmental quality.

When we are looking at environmental issues, we must always remember the important place of agriculture in our society. We are blessed with the most productive agricultural economy in the world. Not only do we feed ourselves, we also help feed the world. So, long as people eat, agriculture will be an important part of our society.

Whatever we do to encourage our farmers and ranchers to address environmental issues, we must do it in ways that strengthen our agricultural economy. We must keep our focus on working lands – not just on idled lands.

We must emphasize the production of food and fiber as the primary purpose of agriculture. That means that the technologies and systems we use to reach environmental goals must be compatible with production systems.

That is already the case with many of our conservation practices. For example, I use no-till on my farm in South Dakota, both for production reasons and for conservation reasons. Another example is the compatibility between production and emission control represented by methane digesters.

The costs of implementing technologies and practices that are good for the environment fall on the landowner operator, but many of the benefits go to the public. So to keep agriculture strong, we must find ways for landowners to recoup the costs. Cost-share programs have traditionally helped landowners recover some of their costs for conservation practices.

Trading in environmental credits will provide the next generation of incentives for conservation. But, trading credits can only happen when we find ways of placing a value on the environmental benefits our farmers and ranchers produce and creating a market for those benefits. And that is where I see the future environmental agenda for crop and livestock producers: in trading credits in a marketplace where environmental benefits have a monetary value.

We are not there yet, but we are beginning to see forces building that will take us in that direction. In the direction of creating a market for the environmental benefits created by agriculture. In the direction of creating incentives that will enable producers to do much more for the environment in a profit-making context. In the direction of utilizing voluntary action as the basis, as opposed to cap-and-control as the basis of trades.

It is important to remember that the marketplace will determine the value of environmental credits. However, providing the information for those markets to work is a substantial challenge for those interested in conservation.

Today, one of the developing areas for environmental credits is greenhouse gasses. President Bush has set an ambitious agenda for reducing greenhouse gasses. He has challenged USDA to recommend targeted incentives for greenhouse gas offsets from agriculture and forests. He also challenged us to help the Department of Energy set up a new and improved registry for crediting private sector actions to offset reductions in greenhouse gases.

We need good science to point out and keep track of all of the benefits of various conservation practices, no matter what goal they are designed to reach. For example, many of the practices that control erosion and improve water quality have the extra benefit of sequestering carbon. Many of the practices we implemented under existing animal waste programs also have the extra benefit of reducing methane emissions.

Realistically, agriculture and forestry offset projects will work best as part of a portfolio with multiple benefits to the environment. Look again at the anaerobic digester as an example. Credits from methane reduction benefits, on their own, may not support an investment in this technology. But combine those credits with other benefits – like public goals for water quality, odor reduction, energy conservation, and air pollutants – and the whole package may well support applying the technology on a larger scale.

The challenge is to move beyond the concept of having a market for environmental goods and services, and develop a system of credits that give businesses the confidence to act. Companies and farmers are understandably reluctant to invest in agriculture offsets without reliable information on the benefits of land management practices. What we need to do is take down the barrier of doubt, confusion, and uncertainty.


Two Futures

So, the most important component of the future environmental agenda for crop and livestock producers involves creating environmental benefits that have a tangible value in the marketplace and having producers generate profits by producing these benefits. It is important that we solve environmental challenges through voluntary action, rather than through regulation.

I want to compare two quite different futures for agriculture when it comes to addressing environmental issues. One is the future under regulation, and the other is the future under voluntary conservation. History shows us that either future is possible. Let me explain why I think a voluntary approach probably is better for all of us.

First, let’s look at the future under regulation.

The regulatory approach focuses first on symptoms of the problem, rather than on its cause. The symptoms may be poor water quality, poor air quality, or some other environmental challenge. The regulatory approach runs the danger of mandating solutions before we know the cause of the problem.

Whether they produce results or not, regulations have real costs, and these costs are not necessarily borne equally. Regulations can cause American farmers and ranchers to operate at an economic disadvantage compared to producers in developing nations. Regulations also can remove incentives for innovation. Under regulation, industries tend to adopt the goal of meeting the standards, rather than a goal of finding new and better ways to get the job done.

We have seen this approach in the management of animal waste. Animal waste is an important problem. Our nation adopted a regulatory approach to solving the problem, and we have seen unintended results both in this country and abroad. Regulations in the livestock industry controlled nutrients in waste, but created a methane problem. Economic forces, coupled with the need to meet regulatory requirements, accelerated consolidation of the livestock feeding industry. Production shifted from state to state, driven largely by market and state regulatory forces. During this time, production has also moved out of the country, to areas where there was less regulation.

One unintended result of this approach is the clearing of huge areas of land in other parts of the world, such as the Cerrado in Brazil, to produce soybeans. Another result is less production – and fewer jobs – in this country, as parts of the livestock industry move to avoid regulation.

Fortunately, with growing cooperation between Federal agencies and the passage of the new farm bill, we are beginning to make it more economical for domestic producers to do their job and meet regulatory requirements. We are seeing a movement toward enabling producers to combine their need for productivity with their desire to take care of the environment. But, we have a long way to go before we bring economics and conservation into proper alignment in the livestock industry.

The other future is the future under voluntary conservation.

In this future, farmers and industry act voluntarily to implement solutions to problems. Secretary Veneman has pointed out that American farmers and ranchers have a strong conservation ethic. In her words, “We all know that farmers are the best stewards of the land.”

The Natural Resources Conservation Service bases its entire philosophy on the conservation ethic of producers. We have seen what producers have done voluntarily to reduce soil loss, improve water quality, and improve wildlife habitat.

In the voluntary approach, we use proven research to motivate producers and to provide high quality technical assistance. We keep regulations “lean and local,” and leave most decisions to local leaders and local producers. We develop voluntary partnerships to provide leadership, funding, and expertise to get the job done. Whenever possible, we use market mechanisms to attain desired results. These results include more conservation on the land and a stronger agriculture industry in our own country, coupled with less environmental degradation abroad.

On a policy level, we should be looking for ways to leverage public and private resources. For example, cost-share programs for erosion and water quality could be combined with private credits for carbon dioxide and nitrous oxide reductions. We can use programs like EQIP to support the concept of trading environmental credits, not to hinder it.

Incentives should be additive, rather than mutually exclusive. This approach would allow us to use multiple incentives to get the results we need.


Conclusion

So, what should America’s farmers and ranchers do to make this new environmental agenda work?

First of all, producers already are doing the most important – and most natural thing – and that is responding to incentives. Voluntary conservation is working in this country. The Administration, the Congress, and the public all support conservation on America’s private lands. The new farm bill is the proof. The response of America’s farmers and ranchers in signing up for programs under the new farm bill shows that an incentives-based, voluntary approach to conservation on private lands is the way to go.

The future of environmental incentives lies in the direction of recognizing the contributions being made on America’s working lands. It is the individual producer who decides what contributions to make, based on individual values, individual business goals, and individual environmental goals.

We are farmers and ranchers because we love the land and love making it produce. I don’t know anyone who is in agriculture simply to qualify for program dollars. So, don’t succumb to the temptation to look at farm bill programs for their own sake. Producers should look beyond the programs and use them as tools to attain their own conservation and business goals. By working toward overall conservation goals, produces will be true to their own values, while positioning themselves to benefit from the new environmental agenda.

NRCS has a 75-year history of encouraging voluntary conservation. A heavy reliance on programs is comparatively recent, and we still believe strongly in the importance of looking at the overall conservation needs of each operation.

Finally, producers must have flexibility and openness to innovation if they are to receive the benefits of credit trading.

Openness to the concept. The whole concept of trading in environmental credit is new to most producers, but it opens a whole new world of economic opportunities.

Openness to new conservation practices. Credits may be available for new conservation practices and systems. Present practices are designed to accomplish agricultural goals. The future may bring additional practices designed primarily to reach environmental goals. A good example is the emerging demand for biofuels to offset fossil fuel emissions. Growing crops to produce fuel instead of food or fiber will likely require significant changes in operating systems.

Openness to new partnerships. The market for credits will be in a new marketplace, with new partners. There will also be opportunities to partner with the scientists who will be doing the research that needs to be done to develop the marketplace for environmental goods and services.

We simply have to move out quickly on these issues, and create an environmental agenda based on voluntary conservation. Or, there is a very real possibility that we will have to live with whatever a future based on regulation might bring. Right now, the outlook is positive for us to move in the direction of voluntary incentives and a market-driven approach to environmental issues.

A market-driven approach will create environmental benefits, an abundance of food and fiber, and a profitable industry for America’s farmers and ranchers. By working together, we can apply the trading concept to many environmental goals and create a new era of conservation and profitability for America’s livestock and crop producers.

Thank you.