© 2007 Plant Management Network.
Evaluating the Economic Benefits and Costs of Zero-Grade Rice
Bradley Watkins, Jason Hill, and Merle Anders, 2900 Hwy. 130 E., Rice Research & Extension Center, University of Arkansas, Stuttgart 72160
Corresponding author: Bradley Watkins. email@example.com
Watkins, B., Hill, J., and Anders, M. 2007. Evaluating the economic benefits and costs of zero-grade rice. Online. Crop Management doi:10.1094/CM-2007-0418-01-RV.
The majority of rice acres in Arkansas are flood irrigated using contour-levee systems. Contour-levee rice fields require large amounts of applied water to maintain a flood during the production season. Fields precision-leveled to a zero grade require significantly less applied water and provide significant savings in production costs relative to contour-levee fields. However, zero grade is a land improvement and requires a large initial capital investment, and much time may pass before economic benefits are received. The rotation chosen for the field after zero grading also impacts the monetary benefit and the length of the investment’s payoff period. This study uses a net present value (NPV) approach to evaluate the monetary benefits and payoff period of zero-grade management in rice production for different rotations. The results indicate that NPV is larger and the payoff period shorter for zero-grade fields when rice is grown continuously rather than rotated with soybeans following the land improvement.
Rice has the largest water requirement of any row crop grown in eastern Arkansas. Water applied to rice accounts for almost 70% of the total volume of water applied to all crops in the region (10). Most irrigation water is supplied by wells tapping into the Mississippi River Valley alluvial aquifer, which underlies nearly all of eastern Arkansas (9). Large water withdrawals are placing strong downward pressure on this groundwater source (1) and it is estimated that over 100 square miles of the alluvial aquifer could be depleted by 2009 if pumping remains at levels observed in 1997 (3). Thus, water is becoming increasingly limiting in many areas of eastern Arkansas where rice has historically been produced. Fifty-five percent of all rice acres in Arkansas are irrigated using conventional contour-levee systems (14). A contour-levee rice field may require as much as 39 applied acre-inches of irrigation water to maintain a flood during an average growing season (2).
Precision-leveled fields require much less applied water during the growing season than contour-levee fields. Precision leveling improves surface irrigation efficiency by removing depressions that hinder water movement across the field. Water travels faster across the field, and the amount of time required to cover the field with water is shortened. In the case of flood irrigation, precision leveling results in a reduction in the minimum depth of water required to cover the entire field (7). The increased irrigation efficiency and lower water input translates into lower irrigation costs and may improve the economic sustainability of growing rice in critical groundwater areas.
An estimated 45% of all Arkansas rice acres were precision leveled in 2005 (14). Most precision-leveled fields are graded to a 0.05 to 0.2% slope. Some rice fields in Arkansas are leveled to a zero slope. Zero-grade rice production accounted for an estimated 5% of planted rice acres in 2005 (14). Zero-grade rice production eliminates the need to build levees each year and results in significantly less irrigation and labor when compared with contour-levee rice production. Tillage can also be eliminated with zero-grade management with the exception of occasional tillage over time to repair rutted fields. Water savings for zero-graded rice fields can be as high as 60% compared to contour-levee rice fields (2).
Zero grade is a land improvement and requires a capital cost to be paid "up front." Some time may pass before the land owner receives economic benefit from the land improvement. Therefore, a few factors need to be considered before making the initial investment to zero grade a field. First, the land owner must determine whether the work will be performed on a custom basis or using on-farm labor and owned dirt-moving equipment (7,8). Custom hire may be appropriate if only a few acres need to be leveled. However, if a large number of acres will be precision leveled, it might be more economical to purchase the dirt-moving equipment and use on-farm labor. Second, rice yields may be lower on cut areas of the field during the initial years following the land improvement (5,13). The lower yields may increase the number of years required to pay off the initial investment. Finally, the crops and the crop sequence of the rotation chosen for the field following the land improvement will likely impact both the monetary benefit (payoff) of the practice and the length of the payoff period for the practice.
The purpose of this study is to provide land owners and farm managers with information for making informed decisions about zero-grade rice management. The objectives are as follows: (i) compare the costs of precision leveling with on-farm labor and owned equipment to the cost of hiring the work done on a custom basis at varying levels of soil moved; and (ii) compare the monetary benefits of zero-grade rice to the initial costs of precision leveling a field to zero grade for different rotation sequences following the land improvement.
A net present value (NPV) approach is used to evaluate the monetary benefits of zero-grade management in rice production. The NPV of an investment is equal to the sum of the present values of annual monetary benefits to the investment over a specific planning horizon less the investment’s initial cost. In this study, zero-grade monetary benefits are defined as the difference in per-acre net returns between zero-grade and contour-levee management, and the initial cost of the investment is defined as the per-acre cost of precision leveling a field to zero grade.
Costs of Precision Leveling
The cost of precision leveling will vary depending on whether the land owner hires the work done on a custom basis or performs the work using owned equipment and on-farm labor. The charges for custom work reported in this study were obtained by contacting two Arkansas land leveling businesses by phone during the summer months of 2006. The unit of payment for custom work can vary by hour or by cubic yard depending on the amount of soil moved per acre. If the per-acre amount of soil moved is small (100 yards³ or less), the custom work is usually charged on an hourly basis and ranges from $125 to $150/h. If large amounts of soil are moved per acre (greater than 100 yards³), the custom work is usually charged by cubic yard and ranges from $1.15 to $1.25/yard³. Other circumstances such as total volume of soil moved and distance soil is moved will influence the payment method selected by the land leveling business.
The charge per cubic yard of precision leveling may be reduced if owned equipment and on-farm labor are used in place of custom hire. Table 1 presents a description of the equipment needed for on-farm precision leveling and the cost per hour and per cubic yard associated with each piece of equipment assuming 300 yards³ of soil per acre are moved on 200 acres of land per year. Purchase price data in Table 1 are based on phone conversations with Arkansas farmers, land leveling professionals, and equipment dealers in Arkansas during the summer months of 2006. Cost figures include fuel, labor, repair and maintenance, depreciation, and interest. Fuel costs were calculated using a farm diesel price of $2.20/gal, and labor costs were calculated assuming a labor wage of $10/h. For this particular example, the total cost per unit of soil moved using owned equipment and on-farm labor ranges from $0.83/yard³ if two dirt pans are used to $0.90/yard³ if one dirt pan is used. Both cost estimates are lower than the custom charges of $1.15 to $1.25/yard³ reported above.
Table 1. Description of on-farm precision leveling setup.
x Estimated volume of soil moved per hour for single pan setup is based on 8 cycles per hour with an 18-yard pan (144 yards³/h with 1 pan). Estimated volume of soil moved per hour for dual pan setup is based on 6 cycles per hour with two 18-yard pans (216 yards³/h with 2 pans).
y Number of annual hours required to move 300 yards³ of soil per acre on 200 acres using either single pan equipment or dual pan equipment.
Estimated costs of precision leveling using on-farm equipment are presented for selected volumes of soil moved in Table 2. These data demonstrate how the amount of soil moved might impact the choice of leveling option used (custom hire versus owned equipment). Custom hire is more attractive when the volume of soil moved is 100 yards³/acre or less. At these volumes, the cost per cubic yard of soil moved for custom hire is lower than that for either the single pan setup or the dual pan setup. Owned equipment becomes more attractive at volumes greater than 100 yards³/acre. The choice of single or dual pan setup also is impacted by the amount of soil moved. The single pan setup produces the lowest cost per volume of soil moved at volumes less than or equal to 200 yards³/acre. Beyond 200 yards³/acre, the dual pan setup results in the lowest cost per cubic yard moved.
Table 2. Estimated costs of precision leveling using on-farm equipment for given volumes of soil moved.
x Costs per hour calculated based on 200 leveled acres per year.
y Estimated volume of soil moved per hour for single pan setup is based on 8 cycles per hour with an 18-yard pan (144 yards³/h with 1 pan). Estimated volume of soil moved per hour for dual pan setup is based on 6 cycles per hour with two 18-yard pans (216 yards³/h with 2 pans).
Table 3 presents the estimated per-acre costs of precision leveling for selected volumes of soil moved using either owned equipment or custom hire. The charges reported in Table 3 include a $10/acre charge for obtaining a cut sheet of the field prior to land leveling. A cut sheet provides a topographic layout of the "cut" and "fill" areas of the field and provides an estimate of the total cubic yards of soil to be moved to achieve the desired grade. A charge of $46.45/acre is also included to account for the cost of applying one ton of loose raw broiler litter as a soil amendment (15). Excluded from the total cost figures reported in Table 3 are charges for ripping (subsoiling). Ripping might be necessary for some fields if soil compaction or hardness prevents efficient scraper operations. Such conditions might prevail if land leveling is conducted during a dry period prior to a rain. An additional charge of $12/acre would be added to the total cost figures in Table 3 to account for ripping.
Table 3. Estimated costs of precision leveling per acre at selected volumes of soil moved with on-farm equipment and custom hiring.
x Custom hired precision leveling charge = $1.15/yard³. Additional charges of $10/acre for obtaining a cut sheet of the field and $46.45/acre for applying one ton of loose raw broiler litter as a soil amendment are included in the total costs. Excluded from total costs are charges for ripping (subsoiling) prior to land leveling, which may be necessary if soil compaction or hardness prevents efficient scraper operation. Ripping would increase cost figures by an additional $12/acre.
The per-acre cost of precision leveling increases as the number of cubic yards of soil moved per acre increases. Custom hire is less costly than owned equipment at volumes less than or equal to 100 yards³/acre. Beyond 100 yards³, land leveling costs are lower when the work is performed using owned equipment. Greater efficiencies may also be achieved for large volumes of soil moved per acre using two dirt pans opposed to one as exhibited by lower per-acre costs for dual pan compared with single pan equipment when 300 or more cubic yards of soil are moved per acre.
Comparison of the Returns and Costs of Zero-Grade to Contour-Levee Management
Gross returns and production costs for rice and soybeans with contour-levee and zero-grade management are presented by crop enterprise in Table 4. Production costs are estimated using the Mississippi State Budget Generator (4). State average rice and soybean yields for the period 2002-2005 are used for contour-levee fields in Table 4 (11). Rice and soybean yields on zero-grade fields are adjusted upward to reflect increased production due to the absence of levees. Rice yields tend to be lower on levees than in bays. Levees make no contribution to soybean yields since levees impede soybean headers and must be removed before combining. It is assumed in Table 4 that levees account for 10% of the area in contour-rice fields and 5% of the area in contour-soybean fields. Rice yields are assumed to be 35% lower on levees, while soybean yields are assumed zero on levees.
Table 4. Gross returns, production costs, and net returns above production costs for rice and soybeans, contour-levee and zero-grade management.
x Four-year average Arkansas rice and irrigated soybean crop yields for the period 2002-2005 are assumed for contour-levee rice and soybeans (11). Rice and soybean yields are adjusted upward for zero-grade management (by a multiple of 1.04 for rice and 1.05 for soybeans) to reflect increased production from greater land area due to the absence of levees.
y Rice irrigation quantities are based on irrigation levels reported for contour-levee and zero-grade management in Epting (2).
z Gross returns were calculated using market prices of $3.39/bu rice and $5.88/bu soybeans. Market prices are net of custom drying charges for rice ($0.30/bu) and custom hauling charges for both rice and soybeans (0.15/bu).
Significant differences exist in cultural management between the two production systems, and these differences impact production costs. Some cost items are higher for zero-grade management such as planting, weed control, fertilization, and water weevil control. Land preparation is also different for the two management systems. Contour-levee systems depend heavily on tillage to manage weeds. In contrast, nearly all tillage is excluded on zero-grade fields to maintain the structure of the field over time. The amount of tillage used on zero-grade fields is minor, and some tillage may be conducted from time to time as a touchup measure to repair occasional ruts. Thus, zero-grade management is in essence no-till management, and the tillage costs associated with this practice are negligible.
Levee construction is unnecessary under zero-grade management since the field has been land formed to a zero slope. No costs are incurred for levee construction under zero-grade management. The zero slope also allows water to travel faster and the flood to be more uniform across the field. Thus the amount of water applied is lower and the total irritation costs are smaller for zero-grade than for contour-levee management. The absence of levees in the field also increases rice harvest efficiency. Combines are able to travel at faster speeds in the absence of levees, and harvest operations are completed earlier. Harvest costs are therefore lower for zero-grade than for contour-levee rice management.
Net returns for each crop under contour-levee and zero-grade management are also presented in Table 4. Rice is more profitable than soybean regardless of the management practice chosen. Net returns are $40/acre greater for rice under contour-levee management and $125/acre greater for rice under zero-grade management. Although rice is a more profitable crop than soybean, the latter crop is generally rotated with rice in Arkansas as a means of controlling red rice, a close weed relative to rice. A two-year rice-soybean rotation is typical for most rice acreage in Arkansas. Net returns above production costs for both crops are greater for zero-grade management than for contour-levee management. The difference in net returns between the two management practices represents the monetary benefit of zero-grade management over contour-levee management. Based on data from Table 4, the estimated monetary benefit of zero-grade management on a crop enterprise basis is $124/acre for rice and $49/acre for soybeans assuming no yield loss on cut areas of the field.
Comparison of Monetary Benefits to Zero-Grade Management Over Time
Present values of monetary benefits to zero-grade management are presented
by rotation and planning horizon in Table 5. Present values of monetary benefits
are calculated using the following formula:
Table 5. Estimated present value of monetary benefits of zero-grade production over contour-levee production.
w Monetary benefits if precision leveling operations prevented planting for one growing season.
x An estimated 30% yield loss was assumed due to deep cuts made for precision leveling. Yield loss was phased out over a 5 year period (30% in year 1; 25% in year 2; 20% in year 3; 10% in year 4; and 5% in year 5).
y Rotation used after precision leveling field. Rice-rice-soybean is a 3-year rotation with two years rice and one year soybean. Rice-rice is a continuous rice rotation. The rotation before precision leveling was assumed to be a rice-soybean rotation.
z Present values are calculated using a 7.75% discount rate.
Annual monetary benefits to zero-grade management (Bt in Equation 1) are calculated assuming a typical rice-soybean rotation for contour-levee management and either a three-year rice-rice-soybean rotation or a continuous rice rotation for zero-grade management. Zero-grade rice producers often increase the frequency of rice in the rotation sequence following the land improvement to recover the cost of the initial investment faster. If precision leveling operations continue past recommended planting dates, the farm operator may choose to delay planting until the following year. Present values in Table 5 are calculated with or without fallow during the first growing season to reflect this possibility. Yield losses may also occur in the initial years after precision leveling due to deep cuts in parts of the field. Thus, present values in Table 5 are calculated both with and without initial yield losses based on conversations with agronomists. A 30% reduction in yield is assessed to zero-grade management in Year 1, and yield losses are phased out during years 2 through 5. Finally, present values of monetary benefits to zero-grade management are calculated using a 7.75% discount rate.
The rotation chosen after precision leveling strongly impacts the monetary benefits associated with zero-grade management. The continuous rice rotation produces the largest monetary benefits in 3 to 4 years following precision leveling when cuts in the field cause no yield reductions. Positive payoffs also occur more quickly for the continuous rice rotation than for the rice-rice-soybean rotation when initial yield losses occur on cut areas of the field. Continuous rice is more profitable than rotating rice with soybeans due to the greater profit potential for rice relative to soybeans as shown in Table 4.
The NPV of monetary benefits to zero-grade management
takes into account the initial cost of precision leveling and is calculated as
An example will be used to demonstrate how the payoff period for zero-grade management may be determined for a particular field situation. Assume that 300 yards³ of soil must be moved per-acre for a given field to maintain a zero grade. The farm operator uses on-farm labor and owns dual pan equipment. The initial cost of precision leveling the field in this instance is $307/acre based on data from Table 3. If the farm operator chooses a continuous rice rotation and does not fallow during the first year of crop production, the number of years required to pay off the initial investment (the first year in the planning horizon where NPV ≥ 0) would range from 3 years assuming no yield loss to 7 years assuming yield loss from deep cuts in parts of the field. The payoff period would be lengthened if the farm operator uses either single pan equipment or custom hires the work (initial cost of $326/acre for the former and $401/acre for the later to move 300 yards³ in Table 3).
Zero-grade management may not be feasible for every field situation. Exceptionally large volumes of soil moved will increase the number of years required to pay off the initial investment and may make the practice impractical for some fields. Assume the farm operator must move 1000 yards³/acre to achieve a zero grade on a particular field. The lowest initial cost to achieve a zero grade is $622/acre assuming owned dual pan equipment is used for the job (Table 3). It would take 6 to 8 years for the farm operator to realize a positive NPV from zero-grade management assuming a continuous rice rotation and no yield losses from cut areas of the field. If yield losses do occur on cut areas of the field, the farm operator would have to wait between 10 and 15 years before receiving a positive NPV using a continuous rice rotation.
Zero-grade management is a water saving option available to rice producers with limited water resources. The practice applies significantly less water than conventional contour-levee management during the growing season. Production costs are also significantly lower for zero-grade management due to less water applied, significantly less tillage, and the absence of levees for managing the flood across the field. However, many factors impact the monetary benefits and the payoff period of zero-grade management. These factors include the method chosen to do the job (custom hire or owned equipment and on-farm labor), the type of rotation used after precision leveling, the amount of soil moved per acre, and the impact of cut areas on crop yields during the initial years of the practice.
On-farm labor and owned equipment may be superior to custom hire when the volume of soil moved per acre is large. The results of this study indicate that custom hire is more attractive at volumes less than 100 yards³/acre, while on-farm labor and owned equipment are more attractive at volumes greater than 100 yards³/acre. Monetary benefits to zero-grade management also appear to be greater if a continuous rice rotation is used. The payoff period for zero-grade management is shorter for continuous rice than for rotations using both rice and soybeans in the crop sequence. Finally, initial yield losses due to deep cuts in the field will increase the number of years required to pay off the initial investment.
Zero-grade management appears to have many attractive elements when compared with contour-levee rice production. However, the economic feasibility of zero-grade management is highly dependent on the amount of soil to be moved. Land leveling costs increase as the number of cubic yards of soil moved per acre increases. The amount of soil to be moved from a field to achieve a zero grade may be too excessive to allow the practice to be profitable in the long term. Also, the feasibility of leveling a field to zero grade is more complicated if land tenure is considered. Over 61% of cropland in eastern Arkansas is rented (12), and crop share arrangements are the primary tenure arrangements used in Arkansas rice production (6). The landowner would generally be responsible for the initial investment in leveling the field to zero grade, but the tenant would receive the benefits of the lower production costs and ease of management. A landowner would likely attempt to recover the initial investment through changes in crop rotation and rental arrangements. As a result, tenants may have to pay additional rent in the form of higher crop shares to the landowner. Also, if a reduction in yield occurs due to land leveling, the reduction in income may result in a net loss for a tenant. The combination of all these aspects influences the feasibility of zero-grade management for both landowners and tenants and represents an important area for further study.
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