Economics mechanized

Paraguay
Soil conservation project (MAG / GTZ)
Economics of no-tillage and crop rotations

Policy and investment implications
Final Report

FAO Report No: 97/075 ISP-PAR
Date: 1 October 1997

Authors: William J. Sorrenson, Investment Centre, FAO
E- Mail: william.sorrenson@clear.net.nz
Justo López Portillo, DIA/ MAG
Mario Núñez, DIA, MAG
July 1997

Summary and conclusions

(Only the summary and conclusions are presented here)
Please refer to the main author or to the MAG- GTZ Soil Conservation Project for the full report. E- Mail: rderpsch@quanta.com.py

(1) The introduction of soybeans to the southern and eastern parts of Paraguay in the early 1970s, followed by wheat in the mid 1970s, using conventional mechanised soil preparation practices with disc ploughs and harrows, initiated a process of widespread soil degradation and erosion. These have now reached levels that threaten the sustainability of commercial agriculture in Paraguay. However, in the neighbouring Brazilian states of Parana, Santa Catarina and Rio Grande do Sul, cost- effective, no- tillage/ crop rotation technologies, which have important soil conservation characteristics, have been researched and developed in similar agro- ecological zones and are now quite extensively used throughout the central and southern parts of Brazil.

(2) The technique of no- tillage (NT) was first used in Paraguay in the late 1970s. Following a slow start, its adoption by Paraguayan farmers gathered momentum increasing from 20,000 ha in 1991/ 92 to an impressive 250,000 ha in 1995/ 96, accounting for about 19% of the land cultivated mechanically.

(3) In 1993, the Ministerio de Agricultura y Ganadería (MAG) and the Deutsche Gesellschaft fur Technische Zusammenarbeit (GTZ), started a project aimed at adapting and further disseminating no- tillage in combination with rotations of both cash and green manure crops in the major grain producing departments of Paraguay. Since very little was known about the economics of these technologies in Paraguay, MAG in association with the GTZ, initiated a detailed investigation, the results of which are detailed in this report.

Methodology

(4) Eighteen farmers, representative of the MAG/ GTZ project target groups of small, medium and large mechanised farmers in south- eastern Paraguay, were selected for in- depth study on the basis of their representativity and availability of farm records¹. Most of these farms were in the Itapua and San Pedro departments. Following recommended practice, no- tillage (NT) and crop rotations were being introduced gradually on most of these farms, normally over four to five years. The time series data collected during the study enabled a valid comparison of NT and conventional cultivation (CC) under roughly the same physical and management conditions over several seasons. Interviews were also held with other farmers during the course of the study to canvas their attitudes towards soil erosion and the NT/ crop rotation technologies.

(5) Based on the farm data collected during the study, and some secondary data (from farmer co- operatives), two sets of representative crop budgets under CC and NT were prepared, one set for each region. In addition, machinery costs (both fixed and variable) were assembled for each region and crop rotations, which were linked to crop budgets to accommodate residual nutrient effects, were specified. The crop budgets, machinery costs, crop rotations and resource endowments (land, labour and capital) were all combined in models of typical farms for each region, so that the financial and economic impacts of NT and crop rotations could be quantified and compared to CC cropping systems.

(6) The farm models were prepared using universally available spreadsheet software. A subsidiary objective of the study was to make the models accessible to extensionists and farmers through extension programmes. Hence the models were structured to permit easy inputting of variables peculiar to an individual farm such as farm size, capital invested, labour complement, rate of adoption of no-tillage, crop yields, crop and farm input prices, interest rate, etc., so as to assist a farmer to decide on how he should introduce NT on his farm, including the choice of crop rotations.

Discussion and Results

(7) The effectiveness of NT in limiting soil erosion in the humid tropics is well known. Besides substantially reducing soil erosion losses, improving soil chemical, physical and biological properties, raising organic matter content, with consequent beneficial impacts on crop productivity, the cropping season is considerably extended. In Paraguay, conventional tilling of the soil is sensitively weather dependent and normally takes between 30- 75 days from harvesting to sowing a subsequent crop. Using NT, this time period is reduced to less than 15 days (the harvester may even be followed immediately by the seeding machine), thus significantly extending the cropping season and providing an opportunity to introduce more crops during the cropping year.

(8) The benefits of introducing green manure crops are also quite well known. Soil erosion losses are further reduced by maintaining soil cover and mulch throughout the year, nutrient recycling and water infiltration are increased, weeds are suppressed, and pest and disease cycles are broken lowering the use of pesticides.

(9) The study has shown that there are a number of additional benefits from adopting NT and crop rotations in place of CC cropping systems. These include: (1) reduced tractor hours and lowered permanent farm labour and machinery costs; (2) savings in fertiliser, insecticide, fungicide and herbicide usage per crop over time in NT compared to CC; and (3) cost savings in NT through eliminating contour terracing and the replanting of crops following heavy rain which is often needed under CC.

(10) Attention is drawn in the report to the fact that the use of NT and crop rotations call for new management skills, particularly, to cost-effectively control weeds. Farmers require a number of years to master these skills, although this period can be significantly reduced through development and extension support oriented by farmers' interests. The key skills required are: (1) selecting the type and quantity of herbicide used; (2) regulation of sprayer pressure, output, speed and timing of herbicide application; (3) the choice and sequencing of cash and green manure crops in rotations; (4) minimising the time between harvesting and the sowing of a subsequent crop; (5) managing ground cover and crop residues; and (6) using spot spraying with weed- specific herbicides or manual labour, where cost- effective, to control sporadic patches of weeds as opposed to blanket spraying with broad- pectrum herbicides. If these skills are not mastered, inevitably weed infestation increases, production costs rise, and crop yields may fall, which combine to significantly erode farm profits. Farmers then revert back to CC methods as they attempt to survive for some more time before reaching the inevitable point of having to abandon their land when it is no longer productive and economic to cultivate².

(11) Comprehensive, yet practical and user- friendly, farm models were developed during the study to enable detailed quantification of the financial benefits and economic impacts of NT/ crop rotations compared to CC cropping practices over 10 years. NT can be introduced over a number of years with the rate of adoption being specified by the user. The recommended practice is to introduce NT over 4 years; normally 10% of the farm in the first year, 40% in the second, 70% in the third and over the whole farm from the fourth year onwards.

(12) Differences in crop yields, as well as per crop fertiliser and herbicide usage (the most significant items of farm costs) were observed on the farms studied under both CC and NT. In general, depending on the crop, yields under CC were following a declining trend³, while the reverse was occurring under NT when used in combination with green manure cover crops and crop rotations. Based on detailed analysis of the case study farms, as well as published research data from Parana (analysed by Sorrenson and Montoya, 1989), crop yields under CC decline over a period of about 10 years by between 5%-15% (depending on the crop), while over approximately the same time period under NT, they increase between 5%- 20% (again depending on the crop). These trends in crop yields were found to impact strongly on farm incomes. Savings in herbicide and fertiliser inputs, per crop, under NT compared to CC, which are partially dependent on the crop rotation being followed, range from 30% to 50%, respectively, over approximately the same period and significantly impact on farm variable costs and profits.⁴

(13) The most commonly used rotations in San Pedro and Itapua, which vary in length from 3 to 5 years, were incorporated in the farm models and are shown below. It can be observed that the number (and range) of crops grown during a cropping year is greater under NT than CC. With NT it is possible to grow soybeans and maize during the main season, as well as out-of-season, and to grow a variety of green manure crops between cash crops to maintain good ground cover on the soil surface to suppress weed growth and to benefit from their residual nutrient effects.

CC= conventional cultivation   NT= no tillage    ¦designates end of cropping year
O= oats   S= soybean   So= off- season soybeans   SF=sunflower   M= maize   Mo= off- season maize
W= wheat   OOr= oats and oilseed radish   C= crotalaria   SG= sorghum   OV= oats and vicia

(14) The possibilities of introducing sunflower and maize in Itapua under CC are limited because of the longer growing seasons and extra time required to prepare the soil (wetter, heavier soils compared to the warmer climate and sandy soils of San Pedro).

Farm-level Financial Analysis Results

(15) The financial impacts of NT and crop rotations are analysed in detail by Sorrenson et al (1997). The financial performance of a typical medium-sized farm (45 ha) and a large- sized farm (135 ha) are traced over a period of 10 years for the San Pedro and Itapua regions. Results are outputted from the farm models for the overall farm, but can also be traced separately for each crop and for each crop rotation. Because the farm models are based on a thorough analysis, spanning an number of years of case study farms, the results can be confidently considered as indicative of what is actually being realised in practice by Paraguayan farmers.

(16) Annual income (by crop), variable and fixed costs (by major categories), net farm income, return on capital and annual tractor hours, are calculated for a typical farm. All revenues and costs are expressed in local currency (Guaraníes - Gs) or United States dollars (US$). The prices used were those prevailing in 1995/ 96.⁵ The same set of prices was used in all years, together with "expected" levels of input/ output coefficients, so that financial performance figures reflect the dynamic effects of soil tillage/ cropping system on crop productivity, quantities of farm inputs used and other farm costs devoid of price changes and other random changes due primarily to climatic variation⁶.

San Pedro

(17) The results of the first and tenth years of a typical large farm (135 ha) in San Pedro are detailed in Table A and summarised below. Farm income decreases (from US$ 77,030 to US$ 68,630) under CC in response to declining crop yields which have been built into the model based on research results from Parana, Brazil, and actual farmer experience in San Pedro. Under NT it increases considerably (from US$ 75,010 to US$ 93,760). At the same time farm costs (both variable and fixed costs, the latter exclusive of the cost of NT equipment) are lower under NT compared to CC. Net farm income increases considerably under NT from US$ 8,570 in year 1 to US$ 31,140 in year 10, while under CC it is calculated to decrease from US$ 4,930 to -US$ 3,010. The changes in income and variable costs under NT, between the first and tenth years, reflect increasing crop yields, a higher cropping intensity and savings per crop in fertiliser, herbicide and insecticide. It is significant to note that these results are based on actual farmer experience in San Pedro.

Itapua

(18) The results for a typical large farm (135 ha) in the Itapua region are detailed in Table B and are summarised below. As in San Pedro, the changes in farm income and costs are also based on actual farmer experience in the region. Farm income decreases (from US$ 64,690 to US$ 61,450) while under NT it increases considerably (from US$ 63,670 to US$ 102,860). Farm costs (both variable and fixed costs, the latter exclusive of the cost of NT equipment) increase under NT compared to CC, but these increases are less than the corresponding increases in farm income. Thus, net farm income increases considerably under NT, from US$ 9,770 in year 1 to US$ 33,700 in year 10, while under CC it is calculated to decrease from US$ 7,300 to US$ 1,100. 

Comparative Summary - San Pedro and Itapua

(19) Highlighted below are the changes between the first and tenth years in net farm income, as well as return on capital and tractor hours, calculated for two representative large farms (135 ha) in San Pedro and Itapua.

(20) All three performance criteria exhibit significant improvements under NT compared to CC in both regions studied. The net farm income figures for NT do not include the purchase cost of a no- tillage drill and auxiliary equipment. These costs can vary largely depending on the type of machinery purchased and whether a farmer opts to buy new or used equipment. Should new machinery be purchased, costs average about US$ 15,000 per farm. Net farm income increases in both regions are expected to be sufficient to pay for the NT equipment within 2 years. Often farmers lower their set- up costs in NT by initially hiring a no- tillage drill, through adapting their conventional drills for no- till, or by purchasing used NT machinery.

(21) The changes in the returns on capital of NT compared to CC are quite impressive. In these calculations allowance is made for the additional investment in NT machinery, costed as new machinery. NT and crop rotations are shown to substantially improve the financial performance of cropping farms in the regions studied, whilst under CC, financial viability becomes seriously threatened within a 10 year time-span.

(22) In both regions, despite increased cropping intensities, total annual tractor hours fall quite sharply by the tenth year in NT compared to CC, with consequential savings in tractor costs and permanent farm labour.

Financial Rates of Returns

(23) Financial rates of return on the marginal investment in NT equipment were calculated over 10 years for medium and large farms in San Pedro and Itapua. It was assumed that new equipment would be purchased. The results are shown below together with average rates of return over the 10 years analysed.

(24) The adoption of NT and crop rotations is much more attractive financially in both regions for large farmers than medium-sized farmers. The reason for this is because in the farm model analysis, it is assumed that the investment costs in NT equipment would be the same irrespective of farm size. Therefore, larger- sized farms are able to capitalise on considerable economies of scale. Savings in permanent labour costs are also greater on the larger farms. Nevertheless, NT and crop rotations are still financially attractive for medium-scale farmers.

(25) Small farmers can also benefit considerably from NT and crop rotations. The focus of this study was the mechanised areas where most of the soil erosion is occurring in Paraguay⁷. The study also included an analysis of the benefits a number of small farmers are obtaining from the mechanised NT/crop rotation technologies. These farmers plant 4-5 ha of soybeans through contracting neighbouring farmers with tractors for their cultivation, spraying, sowing and harvesting operations. These farmers, who are conscious of the costs of soil erosion, have adopted new crop rotations and have their soybean crops directly sown. Ignoring the effects of reduced soil erosion, annual cost savings per small farmer, are estimated at about US$ 440.

Risk Analysis

(26) In all 10 years simulated, net farm income on the large farms was higher under NT than CC in both regions (see table below). Risks, defined as the probability of the net farm income falling below zero in any year, are analysed in the report. It is concluded that risks to a farmer lower considerably following the adoption of NT/ crop rotations compared to CC cropping. The main reasons for this are: (1) higher and more stable yields in NT compared to CC due to improved soil structure, higher water infiltration and soil moisture retention, and reduced pest and diseases; (2) the impact of lowering farm income when soybean and wheat prices fall is less under NT compared to CC because it is possible to diversify into other cash crops; (3) reduced fuel costs under NT compared to CC and therefore lowered impact of increases in the real price of fuel; (4) over time, lower fertiliser and herbicide costs per crop under NT compared to CC as the impact of green manure crops, and the reduced fallow periods between crops, take effect.

(27) Situations are rarely encountered in agricultural technology development whereby highly attractive financial returns are accompanied by a lowering of risks. Generally more profitable technologies carry with them concomitantly higher risks, necessitating the weighing-up by farmers of accepting higher profits with higher risks, as opposed to operating on a lower average profit but with lower risks.

Country-level Economic Analysis Results

(28) Farm models of representative medium and large farms for Itapua and San Pedro were used as the building blocks for an ex-ante economic evaluation of a soil conservation participatory R&D, training and extension project proposed in the report. The project, designed to speed-up the rate of successful adoption of NT/ crop rotations in south- eastern Paraguay, would support on- farm trials, farmer workshops and seminars, study tours, up to 50 additional extensionists who would be specially trained and dedicated to the project, as well as a project management facility. The main output of the project would be a higher rate of adoption of no-tillage, in combination with financially attractive crop rotations, estimated to increase from the present about 20% of farmers to 60%, 75% and 80% by the 5th, 10th and 20th years respectively with the project. Without the project it is estimated that the rate of adoption would increase to 40%, 50% and 55% respectively by the 5th, 10th and 20th years. The direct costs that would be associated with the project over 10 years are estimated at about US$ 20 million. The expected Economic Rate of Return (ERR) over a 20 year period is estimated at 57%. Past research and development costs on NT/ crop rotations have been treated as sunk costs and therefore ignored. In economic prices, the annual incremental crop output valued at farm gate is estimated to rise from US$ 15 million (m), to US$ 32 m and US$ 43 m respectively in the 5th, 10th and 20th years.

Policy and Investment Implications

(29) Two important agricultural policy issues arise from this study. The first is an issue concerning extension policy. Because most soil erosion in Paraguay occurs on the mechanised annually cropped areas, it is these areas -- and the medium and large farmers concerned -- which must be the principal target of soil conservation efforts if sustainable agricultural cropping is to be achieved. However, at present Government of Paraguay (GOP) policy does not support any extension efforts directed at mechanised farmers. Instead public extension efforts are focused exclusively on small farmers using animal traction. Before the proposed interventions designed to increase the rate of sustainable adoption of the NT/ crop rotation techniques can be advanced, the GOP will need to readdress its agricultural extension policy. The study suggests that GOP should support extension efforts for the medium and large cropping farmers through the extension services of the farmer co- operatives, since a successful and cost- effective farmer discussion group model already exists in the country, albeit on a very small scale in two farmer co- operatives. Contracting of private sector extension operators to provide specific extension services, within the context of the proposed interventions, should also be considered and also calls for revising existing extension policies.

(30) The second policy issue relates to the methods of soil conservation to be supported by the GOP. There are three basic choices: (1) outdated conventional methods using contour terraces under CC; (2) reduced tillage combined with contour terracing; (3) NT in combination with crop rotations. Sorrenson and Montoya (1989) analysed these options in detail in Paraná, Brazil, and concluded that the third option was by far the most cost-effective. The work reported in this paper confirms that this option is financially attractive to farmers, cost-effective, economic and environmentally sustainable. GOP should make a clear policy choice on which option it wishes to follow so as to avoid inefficient use of resources in soil conservation efforts, including the Binacional Itaipu Soil Conservation Programme with Brazil and the World Bank assisted Natural Resource Management Project initiated in 1996. So far, a clear policy choice has not been taken and considerable confusion exists.

(31) There are a number of investment implications which arise from the study. Aside from the direct costs of the proposed soil conservation participatory R&D, training and extension interventions, estimated at US$ 20 million over 10 years, investment in additional NT equipment is estimated to be about US 7 m per year during the initial years and reducing thereafter. Although there should be sufficient funds to cover farmers' additional needs for short term finance, there are limited funds available for financing farm machinery over medium terms of 5-7 years. The GOP, through the Banco Nacional de Fomento, should actively pursue with bilateral or international financing agencies, increasing the availability of funds to finance the additional investment which would be needed in NT equipment.

Conclusions

(32) Benefits to farmers from the adoption of no- tillage, in combination with sensible crop rotations, could be substantial. However, in order for farmers to realise these benefits, besides adopting NT, they must markedly alter their cropping systems, switching from monocropping practices to diversified crop rotations, including the use of green manure crops. This necessitates the learning and mastering of an array of new crop management skills. It is clear that participatory R&D, training and extension are needed to speed up the learning of these skills. While the suppliers of machinery and pesticides are active in the extension of NT -- aimed at increasing their sales and not farmers' profits -- farmer co- operatives and farmers deserve to be supported so that the potential benefits to society, which could be captured from these techniques, are optimised.

(33) The study has indicated that investment in public goods over a 10 year period, in the form of participatory R&D, specialist training and extension programmes in no- tillage and crop rotations, would increase the rate of adoption of these technologies and be an economically attractive investment for Paraguay. These efforts should facilitate farmer-led development and private sector extension initiatives. This could be achieved by supporting self-organised groups of no- till farmers either directly, or indirectly through the technical departments of farmer co-operatives. The proposed participatory R&D, extension and training and awareness activities, in combination with substantially increased farm profits, are expected to provide sufficient incentives to encourage most Paraguayan cropping farmers to adopt NT and more diverse crop rotations. These changes in farm production methods are expected to reverse the current trend of declining crop productivity and lead to an economically, ecologically and socially sustainable form of commercial cropping in Paraguay.

(34) The MAG/ GTZ project should be considered as a pilot phase of the proposed participatory R&D/ training/ extension project. The possibility of immediately expanding the MAG/ GTZ activities through the World Bank supported Natural Resources Management Project⁸ should be carefully evaluated since it would save valuable time and would provide useful information which could be incorporated in the formulation of the project identified in this report. 

1. Farms were selected on the basis of their representativity in terms of agro- ecological zoning, farm size and soil tillage/ cropping systems used. The area of summer crops grown per farm ranged from 18 ha to 350 ha.
2. In the San Pedro region, land can be abandoned in as few as 5- 7 years after having been cleared of virgin forest for cropping. In Itapua, the period before abandonment may be as short as 8- 10 years.
3. According to Kelly (1983), it is estimated that if soil erosion continues unchecked, yield declines of 15% in Africa, and 19% and 41% in Southeast and Southwest Asia respectively, are expected in the period 1980- 2000.
4. Over 17 years (1977- 1995) yield increases have been reported in Parana in NT of 86% in maize and 56% in soybeans, at the same time fertiliser inputs have been reduced 30% and 50% in maize and soybeans respectively (F. Djkstra, pers. comm.).
5. A separate set of prices was used for San Pedro and Itapua.
6. The impact of price and climatic variation on farm financial performance under NT and CC are addressed in the report.
7. The second phase of the MAG/ GTZ project which commenced in 1996 includes a component designed to assist small farmers to introduce NT and crop rotations onto to their farms using animal traction. A study of the financial and economic implications of NT and crop rotations on small farms is planned as part of the second phase.
8. This project, despite clear objectives and concepts, distinctly lacks specification on how these will be translated into pragmatic soil conservation activities on farms.