Economic Assessment of Compliance Costs for Ontario Pig Producers under Nutrient Management Regulations

Transcription

1 Economic Assessment of Compliance Costs for Ontario Pig Producers under Nutrient Management Regulations by Nicole Elizabeth Beechey A Thesis Presented to The University of Guelph In partial fulfillment of requirements for the degree of Master of Science in Food, Agricultural and Resource Economics Guelph, Ontario, Canada Nicole E. Beechey, January, 2012

2 ABSTRACT ECONOMIC ASSESSMENT OF COMPLIANCE COSTS FOR ONTARIO PIG PRODUCERS UNDER NUTRIENT MANAGEMENT REGULATIONS Nicole Elizabeth Beechey University of Guelph, 2012 Advisor: Dr. Glenn C. Fox This study investigates the impact of nutrient management regulations on pig farms in Ontario, Canada. Using mathematical programming, small, medium and large farrow to finish and finishing pig farms are examined using uniform and crop requirement based manure application. The model scenarios characterize the cost of compliance when nutrient application standards are applied from the Nutrient Management Act and a previously proposed standard from the Clean Water Act. Compliance costs for scenarios with uniform manure application are 6.47%; while compliance costs for scenarios with crop requirement based manure application are 0.25%. The Nutrient Management Act has two calculations for nutrient application standards, producers must comply with the less binding calculation. Compliance costs for producers under the less binding standard following a uniform manure application strategy are 1.53%; while producers following a crop requirement based manure application strategy have no compliance costs. The proposed Clean Water Act standard is more restrictive than the Nutrient Management Act standards.

3 ACKNOWLEDGEMENTS I would like to start by thanking Dr. Glenn Fox, my advisor, for his guidance, understanding and patience throughout this process. Dr. Fox, you provided me with direction and focus for this project for which I am truly grateful. I would also like to thank the other members of my committee, Dr. John Cranfield and Dr. Michael von Massow for their insights and encouragements at various stages of my thesis. To all of the faculty and staff in FARE thank you for sharing your knowledge with me and all of the support you have provided me during my program. I would also like to thank Ontario Pork and the Ontario Ministry of Agriculture, Food and Rural Affairs for their financial support. A special thanks also goes to Ken McEwan for his guidance on the Ontario Pork industry and to Ken Poon for his help in modelling and writing this thesis. I would also like to recognize Erin Angus at the Graduate Students Association and the many people I have meet through the Graduate Students Association and the College Royal Society during my Master s degree that have supported me over the last two years. A thank you also goes to my family. Thank you to my parents Garry and Janice for their positive encouragement and emotional and financial support throughout my academic pursuits. Thank you to my sisters, Natalie and Rachel for their unique perspectives. Lastly, to my uncle Ken for all of his support and his help in navigating the nuances of Ontario government regulations. iii

4 Table of Contents Table of Figures... vii Table of Tables... viii Chapter 1 Introduction... 1 Background... 1 Nutrient Management Act... 3 Clean Water Act... 8 Economic Problem Statement... 9 Economic Research Problem Statement... 9 Purpose and Objectives Chapter Outlines Chapter 2 Review of Environmental Regulation Compliance Costs for Producers Literature and Environmental Policies affecting Ontario Pig Producers General Environmental Compliance Cost Literature Environmental Compliance Costs Literature in Agriculture Nutrient Management Act Nutrient Units Agricultural and Non-Agricultural Source Materials Nutrient Management Strategy Nutrient Management Plan Nutrient Application Clean Water Act Chapter 3 Model Description, Scenarios, Equations and Data Sources Model Description Model Overview Model Scenarios Algebraic Representation of the Model Base Model Regulatory Constraints Model Calibration Data Sources Prices Costs Manure Related Coefficients iv

5 Crop Related Coefficients Physical Constraints Model Validation Chapter 4 Results and Discussion Base Scenarios Farrow to Finish Pig Production Facilities Scenarios Finishing Pig Production Facilities Scenarios Summary of Base Scenarios Nutrient Management Act Scenarios Pig Production Facilities with Uniform Manure Application Rates Scenarios Pig Production Facilities with Crop Requirement Based Manure Application Rates Scenarios Summary of Nutrient Management Act Scenarios Clean Water Act Scenarios Summary of Clean Water Act Scenarios Model Scenarios with Changes in Prices using Five Year Average Prices Farrow to Finish Pig Production Scenarios Finishing Pig Production Scenarios Model Scenarios with Changes in Phosphorus Soil Test Values Phosphorus Soil Test Value of 7ppm Phosphorus Soil Test of 21ppm Model Scenarios with Changes in Clean Water Act Restriction Discussion Chapter 5 Conclusion Summary Key Findings Policy Implications Suggestions for Further Research References Appendix A Model Results Tables Nutrient Management Act Nutrient Requirement Scenarios Nutrient Management Act Nutrient Removal Scenarios Clean Water Act Farrow to Finish Scenarios Clean Water Act Finishing Scenarios Model Scenarios with Phosphorus Soil Test Value of 7ppm v

6 Model Scenarios with Phosphorus Soil Test Value of 21ppm Farrow to Finish Model Scenarios Using Five Year Average Prices Finishing Model Scenarios Using Five Year Average Prices Appendix B GAMS Code Uniform Manure Application Scenarios Crop Requirement Based Manure Application Scenarios vi

7 Table of Figures Figure 1: Comparison of Number of Farms Reporting Pigs to the Average Number of Pigs per Farm in Ontario from March 2000 to July Figure 2: Percentage of Pigs per County in Southern and Western Ontario in July Figure 3: Movement of gross revenue lines Figure 4: Farm level gross revenue optimization with land and barn capacity constraints Figure 5: Farm level gross revenue optimization with land, barn capacity and non-binding nutrient application constraints Figure 6: Farm level gross revenue optimization with land constraint, barn capacity and binding nutrient application constraint vii

8 Table of Tables Table 1-1: Nutrient Units created throughout pig life stages as determined by the Ontario Nutrient Management Act... 6 Table 3-1: Ontario Pig Production Model Scenarios Table 3-2: 2011 and Five Year Average Prices for Feeder Pig Purchase, Market Pigs and Crops in Ontario Table 3-3: 2011 and Five Year Average Costs for Pig and Crop Production Table 3-4: Farrow to Finish and Finishing Production Facility Manure Related Coefficients Table 3-5: Corn, Soybean and Wheat Crop Nutrient Requirements, Yields and Phosphorus Removal in Huron County Table 3-6: Crop Phosphorus Requirements under Soil Phosphorus Test Values of 7ppm, 12ppm and 21ppm in Huron County Table 3-7: Small, Medium and Large Pig Barn Capacity and Land Constraint Table 3-8: 2009 Average Pig and Crop Prices used for Validation Table 3-9: 2009 Average Pig and Crop Costs used for Validation Table 4-1: Overview of Model Results by Scenario Table 4-2: Sensitivity Analysis of Model Scenarios of Medium and Large Farrow to Finish and Finishing Pig Production Facilities with Crop Requirement Based Manure Application Rates: Changing the Phosphorus Soil Test Values Table 4-3: Sensitivity Analysis of Model Scenarios of Medium and Large Farrow to Finish and Finishing Pig Production Facilities with Crop Requirement Based Manure Application Rates: Changing the Clean Water Act Allowable Percentage of Nutrient Requirement Table 4-4: Model Scenarios Using Five Year Average Prices Table 4-5: Base Solution Model Output for Small, Medium and Large Ontario Farrow to Finish Pig Production Facilities with Uniform Manure Application Rates Table 4-6: Base Solution Model Output for Small, Medium and Large Ontario Farrow to Finish Pig Production Facilities with Crop Requirement Based Manure Application Rates Table 4-7: Base Solution Model Output for Small, Medium and Large Ontario Finishing Pig Production Facilities with Uniform Manure Application Rates Table 4-8: Base Solution Model Output for Small, Medium and Large Ontario Finishing Pig Production Facilities with Crop Requirement Based Manure Application Rates Table 4-9: Total Number of Pigs Produced on Farrow to Finish Pig Production Facilities with Uniform Manure Application Rates Table 4-10: Total Number of Pigs Produced on Finishing Pig Production Facilities with Uniform Manure Application Rates Table 4-11: Comparison of Gross Revenue and Gross Margin Model Output from Farrow to Finish Pig Production Facilities with Uniform Manure Application Rates Table 4-12: Comparison of Gross Revenue and Gross Margin Model Output from Finishing Pig Production Facilities with Uniform Manure Application Rates Table 4-13: Comparison of Shadow Values for the Land Constraint and Barn Capacity from Farrow to Finish Pig Production Facilities with Uniform Manure Application Rates Table 4-14: Comparison of Shadow Values for the Land Constraint and Barn Capacity from Finishing Pig Production Facilities with Uniform Manure Application Rates Table 4-15: Comparison of Manure Application Rates by Crop Type for Farrow to Finish Pig Production Facilities with Crop Requirement Based Manure Application Rates viii

9 Table 4-16: Comparison of Manure Application Rates by Crop Type for Finishing Pig Production Facilities with Crop Requirement Based Manure Application Rates Table 4-17: Comparison of Gross Revenue and Gross Margin Model Output from Farrow to Finish Pig Production Facilities with Crop Requirement Based Manure Application Rates Table 4-18: Comparison of Gross Revenue and Gross Margin Model Output from Finishing Pig Production Facilities with Crop Requirement Based Manure Application Rates Table 4-19: Comparison of Shadow Values for the Land Constraint and Barn Capacity from Farrow to Finish Pig Production Facilities with Crop Requirement Based Manure Application Rates Table 4-20: Comparison of Shadow Values for the Land Constraint and Barn Capacity from Finishing Pig Production Facilities with Crop Requirement Based Manure Application Rates 108 Table 4-21: Total Number of Pigs Produced on Farrow to Finish Pig Production Facilities with Crop Requirement Based Manure Application Rates in the Base and Clean Water Act Scenarios Table 4-22: Total Number of Pigs Produced on Finishing Pig Production Facilities with Crop Requirement Based Manure Application Rates in the Base and Clean Water Act Scenarios Table 4-23: Comparison of Crop Requirement Based Manure Application Rates by Crop Type for Farrow to Finish Pig Production Facilities in the Base and Clean Water Act Scenarios Table 4-24: Comparison of Crop Requirement Based Manure Application Rates by Crop Type for Finishing Pig Production Facilities in the Base and Clean Water Act Scenarios Table 4-25: Comparison of Gross Revenue and Gross Margin Model Output from Farrow to Finish Pig Production Facilities with Crop Requirement Based Manure Application Rates in the Base and Clean Water Act Scenarios Table 4-26: Comparison of Gross Revenue and Gross Margin Model Output from Finishing Pig Production Facilities with Crop Requirement Based Manure Application Rates in the Base and Clean Water Act Scenarios Table 4-27: Comparison of Shadow Values for the Land Constraint and Barn Capacity from Farrow to Finish Pig Production Facilities with Crop Requirement Based Manure Application Rates in the Base and Clean Water Act Scenarios Table 4-28: Comparison of Shadow Values for the Land Constraint and Barn Capacity from Finishing Pig Production Facilities with Crop Requirement Based Manure Application Rates in the Base and Clean Water Act Scenarios Table 4-29: Gross Revenue and Gross Margin in Large Farrow to Finish Pig Production Facilities with Crop Requirement Based Manure Application Rates: 2011 Prices Compared to Five Year Average Prices Table 4-30: Gross Revenue and Gross Margin in Medium Farrow to Finish Pig Production Facilities with Crop Requirement Based Manure Application Rates: 2011 Prices Compared to Five Year Average Prices Table 4-31: Shadow Values for Land Constraint and Barn Capacity in Large Farrow to Finish Pig Production Facilities with Crop Requirement Based Manure Application Rates: 2011 Prices Compared to Five Year Average Prices Table 4-32: Shadow Values for Land Constraint and Barn Capacity in Medium Farrow to Finish Pig Production Facilities with Crop Requirement Based Manure Application Rates: 2011 Prices Compared to Five Year Average Prices ix

10 Table 4-33: Gross Revenue and Gross Margin in Large Finishing Pig Production Facilities with Crop Requirement Based Manure Application Rates: 2011 Prices Compared to Five Year Average Prices Table 4-34: Gross Revenue and Gross Margin in Medium Finishing Pig Production Facilities with Crop Requirement Based Manure Application Rates: 2011 Prices Compared to Five Year Average Prices Table 4-35: Shadow Values for Land Constraint and Barn Capacity in Large Finishing Pig Production Facilities with Crop Requirement Based Manure Application Rates: 2011 Prices Compared to Five Year Average Prices Table 4-36: Shadow Values for Land Constraint and Barn Capacity in Medium Finishing Pig Production Facilities with Crop Requirement Based Manure Application Rates: 2011 Prices Compared to Five Year Average Prices Table 4-37: Comparison of Manure Application Rates by Crop Type for Farrow to Finish Pig Production Facilities with Phosphorus Soil Test of 7ppm Table 4-38: Comparison of Manure Application Rates by Crop Type for Finishing Pig Production Facilities with Phosphorus Soil Test of 7ppm Table 4-39: Comparison of Gross Revenue and Gross Margin Model Output from Farrow to Finish Pig Production Facilities with Crop Requirement Based Manure Application Rates with Phosphorus Soil Test of 7ppm Table 4-40: Comparison of Gross Revenue and Gross Margin Model Output from Finishing Pig Production Facilities with Crop Requirement Based Manure Application Rates with Phosphorus Soil Test of 7ppm Table 4-41: Comparison of Shadow Values for the Land Constraint and Barn Capacity from Farrow to Finish Pig Production Facilities with Crop Requirement Based Manure Application Rates with Phosphorus Soil Test of 7ppm Table 4-42: Comparison of Shadow Values for the Land Constraint and Barn Capacity from Finishing Pig Production Facilities with Crop Requirement Based Manure Application Rates with Phosphorus Soil Test of 7ppm Table 4-43: Comparison of Number of Pigs Produced from Farrow to Finish Pig Production Facilities with Crop Requirement Based Manure Application Rates with Phosphorus Soil Test of 12 ppm and 21ppm Table 4-44: Comparison of Number of Pigs Produced from Finishing Pig Production Facilities with Crop Requirement Based Manure Application Rates with Phosphorus Soil Test of 12 ppm and 21ppm Table 4-45: Comparison of Manure Application Rates by Crop Type for Farrow to Finish Pig Production Facilities with Phosphorus Soil Test of 21ppm Table 4-46: Comparison of Manure Application Rates by Crop Type for Finishing Pig Production Facilities with Phosphorus Soil Test of 21ppm Table 4-47: Comparison of Gross Revenue and Gross Margin Model Output from Farrow to Finish Pig Production Facilities with Crop Requirement Based Manure Application Rates with Phosphorus Soil Test of 21ppm Table 4-48: Comparison of Gross Revenue and Gross Margin Model Output from Finishing Pig Production Facilities with Crop Requirement Based Manure Application Rates with Phosphorus Soil Test of 21ppm x

11 Table 4-49: Comparison of Shadow Values for the Land Constraint and Barn Capacity from Farrow to Finish Pig Production Facilities with Crop Requirement Based Manure Application Rates with Phosphorus Soil Test of 21ppm Table 4-50: Comparison of Shadow Values for the Land Constraint and Barn Capacity from Finishing Pig Production Facilities with Crop Requirement Based Manure Application Rates with Phosphorus Soil Test of 21ppm Table 4-51: Number of Pigs Produced from Farrow to Finish Pig Production Facilities with Crop Requirement Based Manure Application Rates under Clean Water Act Sensitivity Analysis Table 4-52: Number of Pigs Produced from Finishing Pig Production Facilities with Crop Requirement Based Manure Application Rates under Clean Water Act Sensitivity Analysis Table 4-53: Manure Application Rates by Crop Type for Farrow to Finish Pig Production Facilities under Clean Water Act Sensitivity Analysis Table 4-54: Manure Application Rates by Crop Type for Finishing Pig Production Facilities under Clean Water Act Sensitivity Analysis Table 4-55: Gross Revenue and Gross Margin Model Output from Farrow to Finish Pig Production Facilities with Crop Requirement Based Manure Application Rates under Clean Water Act Sensitivity Analysis Table 4-56: Gross Revenue and Gross Margin Model Output from Finishing Pig Production Facilities with Crop Requirement Based Manure Application Rates under Clean Water Act Sensitivity Analysis Table 4-57: Shadow Values for the Land Constraint and Barn Capacity from Farrow to Finish Pig Production Facilities with Crop Requirement Based Manure Application Rates under Clean Water Act Sensitivity Analysis Table 4-58: Shadow Values for the Land Constraint and Barn Capacity from Finishing Pig Production Facilities with Crop Requirement Based Manure Application Rates under Clean Water Act Sensitivity Analysis Table 4-59: Comparison of Compliance costs for Ontario Pig Producers with Farrow to Finish and Finishing Pig Production and Uniform and Crop Requirement Based Manure Application under Nutrient Management Act and Clean Water Act Manure Application Standards Table A-1: Nutrient Management Act Nutrient Requirement Scenario Model Output for Small, Medium and Large Ontario Farrow to Finish Pig Production Facilities with Uniform Manure Application Rates Table A-2: Nutrient Management Act Nutrient Requirement Scenario Model Output for Small, Medium and Large Ontario Finishing Pig Production Facilities with Uniform Manure Application Rates Table A-3: Nutrient Management Act Nutrient Requirement Scenario Model Output for Small, Medium and Large Ontario Farrow to Finish Pig Production Facilities with Crop Requirement Based Manure Application Rates Table A-4: Nutrient Management Act Nutrient Requirement Scenario Model Output for Small, Medium and Large Ontario Finishing Production Facilities with Crop Requirement Based Manure Application Rates Table A-5: Nutrient Management Act Nutrient Removal Scenario Model Output for Small, Medium and Large Ontario Farrow to Finish Pig Production Facilities with Uniform Manure Application Rates xi

12 Table A-6: Nutrient Management Act Nutrient Removal Scenario Model Output for Small, Medium and Large Ontario Finishing Pig Production Facilities with Uniform Manure Application Rates Table A-7: Nutrient Management Act Nutrient Removal Scenario Model Output for Small, Medium and Large Ontario Farrow to Finish Pig Production Facilities with Crop Requirement Based Manure Application Rates Table A-8: Nutrient Management Act Nutrient Removal Scenario Model Output for Small, Medium and Large Ontario Finishing Pig Production Facilities with Crop Requirement Based Manure Application Rates Table A-9: Clean Water Act Scenario Model Output for Small, Medium and Large Ontario Farrow to Finish Pig Production Facilities with Crop Requirement Based Manure Application Rates limited to 115% of Crop Nutrient Requirements Table A-10: Clean Water Act Scenario Model Output for Medium and Large Ontario Farrow to Finish Pig Production Facilities with Crop Requirement Based Manure Application Rates limited to 110% of Crop Nutrient Requirements Table A-11: Clean Water Act Scenario Model Output for Medium and Large Ontario Farrow to Finish Pig Production Facilities with Crop Requirement Based Manure Application Rates limited to 120% of Crop Nutrient Requirements Table A-12: Clean Water Act Scenario Model Output for Small, Medium and Large Ontario Finishing Pig Production Facilities with Crop Requirement Based Manure Application Rates limited to 115% of Crop Nutrient Requirements Table A-13: Clean Water Act Scenario Model Output for Medium and Large Ontario Finishing Pig Production Facilities with Crop Requirement Based Manure Application Rates limited to 110% of Crop Nutrient Requirements Table A-14: Clean Water Act Scenario Model Output for Medium and Large Ontario Finishing Pig Production Facilities with Crop Requirement Based Manure Application Rates limited to 120% of Crop Nutrient Requirements Table A-15: Base Solution Model Output for Medium and Large Ontario Farrow to Finish Pig Production Facilities with Crop Requirement Based Manure Application with Phosphorus Soil Test Values of 7ppm Table A-16: Nutrient Management Act Nutrient Requirement Constraint Model Output for Medium and Large Ontario Farrow to Finish Pig Production Facilities with Crop Requirement Based Manure Application Rates with Phosphorus Soil Test Values of 7ppm Table A-17: Nutrient Management Act Nutrient Removal Constraint Model Output for Medium and Large Ontario Farrow to Finish Pig Production Facilities with Crop Requirement Based Manure Application Rates with Phosphorus Soil Test Values of 7ppm Table A-18: Clean Water Act Constraint Model Output for Medium and Large Ontario Farrow to Finish Pig Production Facilities with Crop Requirement Based Manure Application Rates with Phosphorus Soil Test Values of 7ppm Table A-19: Base Solution Model Output for Medium and Large Ontario Finishing Pig Production Facilities with Crop Requirement Based Manure Application Rates with Phosphorus Soil Test Values of 7ppm Table A-20: Nutrient Management Act Nutrient Requirement Constraint Model Output for Medium and Large Ontario Finishing Pig Production Facilities with Crop Requirement Based Manure Application Rates with Phosphorus Soil Test Values of 7ppm xii

13 Table A-21: Nutrient Management Act Nutrient Removal Constraint Model Output for Medium and Large Ontario Finishing Pig Production Facilities with Crop Requirement Based Manure Application Rates with Phosphorus Soil Test Values of 7ppm Table A-22: Clean Water Act Constraint Model Output for Medium and Large Ontario Finishing Pig Production Facilities with Crop Requirement Based Manure Application Rates with Phosphorus Soil Test Values of 7ppm Table A-23: Base Solution Model Output for Medium and Large Ontario Farrow to Finish Pig Production Facilities with Crop Requirement Based Manure Application Rates with Phosphorus Soil Test Values of 21ppm Table A-24: Nutrient Management Act Nutrient Requirement Constraint Model Output for Medium and Large Ontario Farrow to Finish Pig Production Facilities with Crop Requirement Based Manure Application Rates with Phosphorus Soil Test Values of 21ppm Table A-25: Nutrient Management Act Nutrient Removal Constraint Model Output for Medium and Large Ontario Farrow to Finish Pig Production Facilities with Crop Requirement Based Manure Application Rates with Phosphorus Soil Test Values of 21ppm Table A-26: Clean Water Act Constraint Model Output for Medium and Large Ontario Farrow to Finish Pig Production Facilities with Crop Requirement Based Manure Application Rates with Phosphorus Soil Test Values of 21ppm Table A-27: Base Solution Model Output for Medium and Large Ontario Finishing Pig Production Facilities with Crop Requirement Based Manure Application Rates with Phosphorus Soil Test Values of 21ppm Table A-28: Nutrient Management Act Nutrient Requirement Constraint Model Output for Medium and Large Ontario Finishing Pig Production Facilities with Crop Requirement Based Manure Application Rates with Phosphorus Soil Test Values of 21ppm Table A-29: Nutrient Management Act Nutrient Removal Constraint Model Output for Medium and Large Ontario Finishing Pig Production Facilities with Crop Requirement Based Manure Application Rates with Phosphorus Soil Test Values of 21ppm Table A-30: Clean Water Act Constraint Model Output for Medium and Large Ontario Finishing Pig Production Facilities with Crop Requirement Based Manure Application Rates with Phosphorus Soil Test Values of 21ppm Table A-31: Base Model Output for Medium and Large Ontario Farrow to Finish Pig Production Facilities with Crop Requirement Based Manure Application Rates using five year average prices Table A-32: Nutrient Management Act Nutrient Requirement Constraint Model Output for Medium and Large Ontario Farrow to Finish Pig Production Facilities with Crop Requirement Based Manure Application Rates using five year average prices Table A-33: Nutrient Management Act Nutrient Removal Constraint Model Output for Medium and Large Ontario Farrow to Finish Pig Production Facilities with Crop Requirement Based Manure Application Rates using five year average prices Table A-34: Clean Water Act Constraint Model Output for Medium and Large Ontario Farrow to Finish Pig Production Facilities with Crop Requirement Based Manure Application Rates using five year average prices Table A-35: Base Model Output for Medium and Large Ontario Finishing Pig Production Facilities with Crop Requirement Based Manure Application Rates using five year average prices xiii

14 Table A-36: Nutrient Management Act Nutrient Requirement Constraint Model Output for Medium and Large Ontario Finishing Pig Production Facilities with Crop Requirement Based Manure Application Rates using five year average prices Table A-37: Nutrient Management Act Nutrient Removal Constraint Model Output for Medium and Large Ontario Finishing Pig Production Facilities with Crop Requirement Based Manure Application Rates using five year average prices Table A-38: Clean Water Act Constraint Model Output for Medium and Large Ontario Finishing Pig Production Facilities with Crop Requirement Based Manure Application Rates using five year average prices xiv

15 Chapter 1 Introduction Background Increased consolidation and intensification of pig farms has led to concerns about externalities that animal production imposes on the environment and general welfare of society. Martin and Zering (1997) describe the relationship in the United States between pig production and the environment noting the significant economic benefits to rural communities and highlighting some of the environmental concerns including pollution of groundwater, surface water and soils. Events such as the Walkerton Tragedy in Ontario heightened public concerns about the impact of manure application in on water quality which accelerated the Ontario government s enactment of legislation to regulate manure application and protect water quality in Ontario. The Nutrient Management Act was enacted in 2002 through the Ontario Ministry of Food, Agriculture and Rural Affairs, shortly after the Walkerton Inquiry report was released. The Nutrient Management Act was already in being written and considered when the Walkerton Tragedy occurred. Following the Walkerton Inquiry report release, the Clean Water Act was enacted in 2007 through the Ontario Ministry of the Environment. Pig producers in Ontario must comply with the regulations of both ministries which have implications for production and management practices. Pig production facilities have become more consolidated and larger over the years as producers attempt to take advantage of economies of scale. Figure 1 illustrates this trend over the past ten years, as the number of pig production facilities declines, the number of pigs produced per facility rises. The greatest number of pig producers in 2010, 49%, market up to 900 pigs per year. However, only 7% of all pigs marketed in Ontario are produced on these small farms 1

16 (Ontario Pork Producers' Marketing Board 2010a ). A further 35% of pig producers market between 900 and 4,500 pigs per year and market 36% of pigs in Ontario. The final 16% of pig producers market over 4,500 pigs per year and these large farms market 57% of all pigs in Ontario (Ontario Pork Producers' Marketing Board 2010a ). According to Ontario Pork, the pork production industry contributed over $4 billion to the Ontario economy in 2010 (Ontario Pork Producers' Marketing Board 2010b). The total value of sales for market pigs was $663.1 million in 2010 (Ontario Pork Producers' Marketing Board 2010b). Pig production is most prevalent in the Southern and Western Ontario areas with 95% of all pigs on farms in these two areas on Ontario (Ontario Pork Producers' Marketing Board 2010a ). The counties of Brant, Chatham-Kent, Elgin, Essex, Haldimand-Norfolk, Hamilton, Lambton, Middlesex, Niagara and Oxford are included in the Southern Ontario area and hold 39% of pigs in Ontario. Western Ontario includes Bruce, Dufferin, Grey, Halton, Huron, Peel, Perth, Simcoe, Waterloo and Wellington counties which hold 56% of pigs in Ontario. As seen in Figure 2 Huron and Perth counties produce the greatest number of pigs in Ontario. There are many types of pig production in Ontario including farrow to finish, finishing, farrow to wean, wean to finish and nursery. The most prevalent types of pig production are farrow to finish and finishing (McEwan 2011). Pig producers for many years received very low prices for their pigs, faced high feed costs which combined with a high Canadian dollar made pig production unprofitable for many producers. This culminated in the implementation of the Hog Farm Transition Program which provided Canadian pig producers with financial assistance to exit the pig production industry (Ontario Pork Producers' Marketing Board 2011). Under this program, producers agreed to empty their barns for three consecutive years in order to receive the funds allocated by 2

17 Agriculture and Agri-Food Canada. Since this program was created, prices received for pigs have increased although feed costs and the Canadian dollar remain high. Producers face increased volatility of input costs and output prices which causes them to be concerned about environmental regulations that they perceive as creating more costs for them while they are already under financial strains. This study will examine the cost of compliance with environmental regulations in Ontario. Nutrient Management Act The Nutrient Management Act (2002) regulates manure application for all agricultural producers in Ontario. Under the Nutrient Management Act (2002), producers are given standards on the application of manure to land with regards to when, where and how much manure can be applied to a particular piece of land. The stated goal of the Nutrient Management Act (2002) is to ensure sustainable and environmentally sound agricultural practices with regards to nutrient management. The Nutrient Management Act (2002) defines nutrients as elements required for plant growth such as nitrogen and phosphorus as well as organic matter that helps to improve the quality of the soil (Ontario Ministry of Agriculture, Food and Rural Affairs 2009a). A Nutrient Unit is designed to provide direct comparisons between different farm types and is defined as the amount of nutrients equivalent to a fertilizer replacement value of the lower of 43kg of nitrogen or 55kg of phosphate (Ontario Ministry of Agriculture, Food and Rural Affairs 2009a). As pigs grow they create more manure and the number of pigs that it takes to create one nutrient unit decreases. Table 1-1 shows that, at the weaner stage of the growth cycle, it takes 20 pigs to create one nutrient unit while only 6 feeder pigs create a nutrient unit. 3

18 Figure 1: Comparison of Number of Farms Reporting Pigs to the Average Number of Pigs per Farm in Ontario from March 2000 to July Number of Pig Farms Average Number of Pigs per Farm Number of Pig Farms Average Number of Pigs per Farm Year Source: (Statistics Canada No date) 4

19 Figure 2: Percentage of Pigs per County in Southern and Western Ontario in July 2009 Brant 1% Waterloo 5% Wellington 9% Simcoe 2% Chatham-Kent 4% Elgin 2% Essex 1% Lambton 8% Haldimand-Norfolk 3% Hamilton 0% Perth 18% Peel 0% Huron 19% Halton 0% Source: (Ontario Pork Producers' Marketing Board 2010a ) Grey 1% Middlesex 8% Oxford 12% Dufferin 1% Bruce 4% Niagara 1% 5

20 Table 1-1: Nutrient Units created throughout pig life stages as determined by the Ontario Nutrient Management Act Average Weight Nutrient Units Number of Pigs to Life Stage (lbs) (animals/nu) Create 300 NU 1 Weaners ,000 Feeders ,800 Gilts (Breeders) ,500 Sows (dry) and Boars ,050 Sows with litters ,050 Source: (Ontario Ministry of Agriculture, Food and Rural Affairs 2009b) 1 Producers with 300 nutrient units or more must comply with the Nutrient Management Act 6

21 Pig producers must prepare either a Nutrient Management Strategy or a Nutrient Management Plan under the Nutrient Management Act. A Nutrient Management Strategy describes a method to manage nutrients in an environmentally acceptable manner on the pig operation (Ontario Ministry of Agricuture, Food and Rural Affairs 2009c). A Nutrient Management Plan is similar to a Nutrient Management Strategy and includes the same information as a Nutrient Management Strategy. A Nutrient Management Plan differs from a Nutrient Management Strategy because it also includes a detailed explanation of how nutrients will be applied to a given land base and is based on the characteristics of the individual fields and the actual manure components. A Nutrient Management Plan is required for pig operations that generate 300 NU or more or for those who are located within 100 metres of a municipal well (Ontario Ministry of Agricuture, Food and Rural Affairs 2009c). A pig operation would need to produce over 6000 weaner pigs, over 1050 sows, over 1500 gilts, over 1800 feeder pigs or some combination of these ages of pigs per year to reach the 300 nutrient units required for a Nutrient Management Plan as indicated in Table 1-1 (Ontario Ministry of Agriculture, Food and Rural Affairs 2011c). A Nutrient Management Plan includes information about the storage of manure, which fields it will be applied to, the crops that will be planted on the fields and how the manure will be applied. Within the fields category, a producer must include information on where the field is located, sketches of the field and soil samples with analyses. Producers must also specify crop rotations, tillage practices and past yields from these fields. Producers who must prepare only a Nutrient Management Strategy do not have to go to this level of detail but do have to include the destination of the nutrients and information about anaerobic digestion facilities if applicable (Ontario Ministry of Agricuture, Food and Rural Affairs 2009c). 7

22 Clean Water Act The Clean Water Act (2007) was enacted in response to the Walkerton Inquiry. The Clean Water Act (2007) is designed to preserve the quality of drinking water in Ontario. The Walkerton Inquiry examined the events of May 2000 which led to the death of seven people and 2,300 becoming ill as a result of water contaminated with E.Coli bacteria in Walkerton, Ontario (Livernois 2002). The Clean Water Act (2007) addresses recommendations of the Walkerton Inquiry report on the protection of drinking water at the source. The Clean Water Act (2007) calls for Ontario communities to examine their water supply to identify current and prospective hazards (Ontario Ministry of the Environment 2006). The communities are then required to create and put into action plans to reduce and eliminate these hazards. The Clean Water Act (2007) states that these plans must be based on reliable scientific evidence and the participation of the local citizens in the planning process (Ontario Ministry of the Environment 2006). The Ontario Government committed funding to help communities undertake scientific studies in order to provide a stable technical foundation for water resource protection planning. The government also pledged financial assistance to help farmers and rural businesses reduce threats to drinking water under the drinking water stewardship program (Ontario Ministry of the Environment 2006). The Clean Water Act (2007), legislated by the Ontario Ministry of the Environment can restrict activities on private property which fall into wellhead protection areas or intake protection zones as long as scientific evidence clearly indicates that the restricted activities pose considerable risks to drinking water (Ontario Ministry of the Environment 2006). Pig producers may be required to develop a risk management plan if their practices are threatening the local water supply. If they are already following management practices to alleviate risks, producers 8

23 can prove that they have taken these steps so no new plan needs to be established. Inspectors and officials will need access to the properties in order to assess the potential risks, to develop the risk management plan and to ensure that the plan is being utilized. In all cases property owners must be notified in advance of the inspection and inspectors cannot enter a dwelling without consent of the owner, occupant or a court issued warrant. Force cannot be used in carrying out inspections and any adverse effects to property must be remedied by the person conducting the inspection (Ontario Ministry of the Environment 2006). Economic Problem Statement Pig producers in Ontario must make decisions on how to manage their operations in the context of legislation enacted by the Ontario government in response to the increased environmental awareness prevalent throughout the province. Thus, pig producers are faced with the economic problem of making decisions about managing their farms to optimize profits while complying with nutrient management and environmental regulations. The management of a pig operation is complex as a producer often takes on the responsibilities of an animal scientist, crop specialist and accountant amongst other careers that are involved in the day to day business of a farm operation. The addition of regulations which detail manure management requirements may further complicate the decision making process for a producer or they may provide producers with better information to make informed decisions about their operations. In either case, decisions on how to proceed given regulations determined by the Ontario Government must be made at the producer level. Economic Research Problem Statement The level of compliance costs Ontario pig producers face in order to adjust production practices to comply with environmental regulations has not been fully explored and there is a 9

24 lack of information about the nature and magnitude of these costs. More studies have been completed in the United States regarding environmental compliance costs and manure application for pig producers. Fleming et al. (1998) found that manure is a valuable alternative to inorganic fertilizer application for pig producers in Iowa. Their study is limited to finishing pig production in Iowa where pig production is somewhat different from Ontario. Fleming et al. (1998) incorporate the Iowa manure application standard however it is nitrogen based unlike the Ontario manure application standard which is phosphorus based. They do not calculate the costs of compliance with environmental standards instead focusing on whether manure is valuable for replacing fertilizer. Yap et al. (2004) create a mathematical programming model of a specific finishing pig production facility in North Central Indiana to test the impact of changing manure application limits from nitrogen to phosphorus based. They also only examine a large finishing production facility. Huang et al. (2001) also examine phosphorus based manure application limits but include medium sized farms as well as farrow to finish production types over a larger area than Yap et al., the heartland of the United States. In Canada, Ghazalian et al. (2010) examine the impact of best management practices to reduce chemical runoff and the abatement costs associated with these practices. However, they study aggregate livestock production in Quebec, it is possible that each type of livestock would have different costs based on different production practices, manure nutrient content, input costs and output prices. De Vos et al. (2003) examine Ontario finishing pig production to determine the profit-maximizing manure management systems that also reduce three manure related pollutants, ammonia, nitrogen and phosphorus. However, they do not consider farrow to finish pig production. Their analysis also occurs prior to the implementation of the Nutrient 10

25 Management Act or Clean Water Act so there are no limitations on the specific reduction of phosphorus or nitrogen. This study will examine how the Nutrient Management Act and Clean Water Act standards affect costs for pig producers in Ontario. Ontario pig producers are interested in knowing the impacts of the Nutrient Management Act on their production facilities. Policy makers in Ontario will also benefit from an increased understanding of the impacts of their policies on pig producers. This study will examine farrow to finish pig production facilities as well as finishing pig production facilities unlike many of the studies noted above. This study will examine these facility types in the context of small, medium and large farms. This study provides producers and policy makers with a model for calculating the compliance costs resulting from these environmental protection standards. Unlike many of the studies mentioned above, this model can be adapted to test future policy iterations and to examine the compliance costs a particular producer may face given the input and output costs for their specific farm. Purpose and Objectives The purpose of this study is to analyse the level of compliance costs Ontario pig producers face to comply with environmental regulations and investigate the implications of future policy iterations. Through this study, policy makers and pig producers will gain a clearer picture of the costs that producers face for compliance with environmental regulation. The objectives of this study are to: 1. Review nutrient management policies in order to understand the implications for Ontario pig farms 2. Understand economic theories for analyzing compliance costs for pig producers under nutrient management policies by compiling a literature review 11

26 3. Develop a conceptual framework of environmental regulation compliance costs for pig producers by combining farm level economic information and estimates of environmental compliance costs 4. Measure nutrient management regulation compliance costs for Ontario pig farmers, including future policy iterations by creating an optimization model in mathematical programming of Ontario pig operations Chapter Outlines The following section details the contents of each chapter. Chapter 2: Review of Environmental Regulation Compliance Costs for Producers Literature and Environmental Policies affecting Ontario Pig Producers This chapter reviews the literature related to the economic impacts of environmental regulations and nutrient management regulations. This chapter also provides a summary of the Nutrient Management Act and Clean Water Act with regards to the effects these Acts have on pig production. This chapter also reviews the work of Poon (2009) on the impacts of environmental regulations on dairy production in Ontario. Chapter 3: Model Description, Scenarios, Equations and Data Sources This chapter provides the development of the theoretical model and graphical representations of the model. The algebraic representation of the model is also included in this chapter which includes the various equations used in the model. The data sources are also found in this chapter. Chapter 4: Results and Discussion This chapter will provide a detailed analysis of the results of the model in the base scenarios, optimization under the Nutrient Management Act and Clean Water Act regulations as well as sensitivity analysis. 12

27 Chapter 5: Conclusion This chapter summarizes the findings of the study and discusses the implications of the results for Ontario pig producers and policy makers. This chapter will also make suggestions for future research. 13

28 Chapter 2 Review of Environmental Regulation Compliance Costs for Producers Literature and Environmental Policies affecting Ontario Pig Producers This chapter examines the literature related to general environmental regulations and the cost of compliance with environmental regulations. Environmental regulations and their compliance costs will also be examined in the context of the swine industry. The last piece of this review describes environmental protection legislation in Ontario that pig producers must comply with, specifically, the Nutrient Management Act and the Clean Water Act. General Environmental Compliance Cost Literature This section discusses existing literature that examines the cost of compliance with environmental regulations in industries other than agriculture. The aim of this section is to show some comparison between other industries and agriculture. Many of these studies and indicate that compliance costs for industries are small, usually around 1% of the gross output of the industry (Hitchens 1997). Hitchens (1997) reviews policies and literature in the European context and comes to the conclusion that environmental policies have negligible effects on competitiveness. Hitchens concludes that there is little evidence to support environmental policies causing losses in comparative advantage or industries moving to pollution havens. He also concludes that there is little statistical evidence supporting the theory that regulation improves competitiveness. Hitchens explains that the most likely reasons environmental policies do not affect competitiveness are that the compliance costs only account for a small fraction of total costs and that even with stringency in compliance costs varies from country to country, the differential costs between major trading partners are not likely to be large. Kneller and Manderson (2010) study the relationship between environmental compliance costs and innovation in the UK s manufacturing industry from Their results indicate 14

29 that pressure to reduce pollution does result in greater innovation within industry to reduce harmful environmental outputs. However, greater research and development only occurs as a positive response to environmental compliance costs in industries with high environmental costs. Kneller and Manderson do not find evidence that innovation reduces compliance costs. Klassen and McLaughlin (1996) examine the effects of environmental management on stock prices for companies on the New York Stock Exchange or the American Stock Exchange. Klassen and McLaughlin use environmental performance awards won by the company to proxy for positive environmental management and environmental crises as indicators for negative environmental management. They find that positive environmental management has significant positive effects on returns while negative environmental management has significant negative effects on returns. Millimet (2003) examined the impact of environmental compliance costs on the size of manufacturing establishments in the United States within pollution-intensive industries including chemicals and allied products, petroleum and coal products, primary metal industries, fabricated metal industries, transportation equipment and stone, clay and glass products. In these types of industries, high environmental abatement costs lead to larger sizes of manufacturing establishments. The results found in industrial examinations of environmental compliance costs are similar to those that will be discussed in the next section. Industries face some compliance costs but in many cases the costs are not prohibitive, companies are still profitable because the costs are small. Environmental Compliance Costs Literature in Agriculture Key and Kaplan (2007) consider the impacts of the Clean Water Act and Clean Air Act in the United States for pig producers. In their study they look at the impacts of each Act separately 15

30 and then the impacts of the Acts together. They discuss how addressing pollution in a single area such as water could result in negative impacts on other areas of pollution such as land or air. Within their analysis they consider only nitrogen emissions in water and air media. Their main purpose is to examine if by only considering pollution standards for water air pollution would be negatively affect. Their study is limited to examining nitrogen application. This study will consider phosphorus limits, as Key and Kaplan (2007) point out, a phosphorus standard can be more binding and require lower manure application rates which could result in higher costs for producers. Feinerman, Bosch and Pease (2004) confirm this possibility in Virginia as they found that a phosphorus limit would also reduce nitrogen accumulation whereas a nitrogen limit would actually increase the phosphorus build-up in the soil. Ribaudo et al. (2003) examine how much more land will be needed by pig producers as manure application restrictions increase in the USA. They found that small operations could meet nitrogen restrictions but that larger operations would have trouble meeting both nitrogen and phosphorus restrictions. They convert animal numbers into animal units which would be similar to the process under the Nutrient Management Act of converting to nutrient units although the direct conversion between animal units and nutrient units is unknown (Ribaudo, Gollehon and Agapoff 2003). Unlike Key and Kaplan, this study attempts to account for the potential differences in production practices and constraints faced by different sizes of operations. Ribaudo et al. (2003) examined production facilities with greater than 25 pigs on the operation at any time of the year through a survey and looked at small (less than 1000 animal units) and large (greater than 1000 animal units) operations separately. The study by Ribaudo et al. does not consider the costs of complying with manure application restrictions which will be 16