Integrating Soil Resources into Economic Accounting at the Farm
Level: A Brief Overview
Pilar Santacoloma
ABSTRACT
Where farm record keeping is used to calculate farm-household income, it commonly
considers only financial accounts. Awareness of resource degradation or
improvement, however, calls urgently for a better understanding of the interrelations
between environmental and socio-economic aspects in decision-making. This paper
presents an overview of a methodology aimed at integrating environmental and
economic accounts at the farm level. Emphasis is on including natural capital
deterioration as part of production costs, with the aim of identifying sustainable
farm-household income. The method is based on a nutrient flow balance calculated
both in physical and financial terms. Calculations consider nutrient inflows and
outflows derived from agricultural practices as well as those derived from natural
processes. Data requirements are mainly biophysical conditions, soil
deterioration/improvement, farm management and nutrient contents. Preliminary
evaluations show the method’s usefulness for valuing efficiency of soil resources and
nutrient management, as well as for illustrating the value of environmental assets to
decision-makers.
INTRODUCTION
Non-conventional agricultural practices are emerging worldwide as an alternative for
confronting problems of natural resource degradation. From an agro-ecological
viewpoint, they contribute to, among other things, nutrient restitution, higher
productivity and efficient resource use and allocation, (Altieri, 1995; Lampking et.
al., 1999). In spite of their technical benefits being recognised, they are little
disseminated among farmers. Many reasons might explain this. This paper argues
that to be broadly disseminated, these technologies should reveal clearly their
advantages in economic value.
Attempting to contribute to a better understanding of these technologies, the paper
presents an overview of a methodology aimed at integrating environmental and
economic accounts at the farm level. On a broader scale, however, it emphasises
basic principles of integrating the value of soil quality changes into economic
accounts under specific technologies to estimate sustainable household income.
Following the international agreement known as Agenda 21, the United Nations
Statistical Division (UNSD) developed a methodological framework for accounting
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for natural resources and valuing the changes in them arising from economic growth
at the national level (United Nations, Statistical and Social Affairs, 2000). A similar
approach for agricultural development at the farm level was, however, left for further
operational developments. The Farm Management and Production Economics
Service (AGSP) of FAO and The Royal Tropical Institute (KIT), the Netherlands, in
collaboration, proposed a methodology to better integrate land degradation into
financial and economic accounting of small-farm production systems (Moukoko and
van der Pol, 1999).
The following section attempts to summarise relevant theoretical aspects of this
methodology, specifying data requirements and processing. The third section
illustrates institutional arrangements for implementing the methodology and gives
examples of the type of outcomes to be drawn from it. Finally, the last section, as a
result of recent evaluations undertaken in compilation sites, discusses the potential
usefulness and challenges of applying the methodology.
2.
Methodological Aspects
The basic principle of the methodology is to incorporate calculations of natural
capital deterioration in production costs in order to identify sustainable farmhousehold income. Usually the value of the nutrients coming from natural processes
is not accounted for even when there is positive soil restoration. It is common to
value the output produced from agriculture, but not the decline or increase in the
output-generating capacity. Such considerations should be an incentive to farmers to
improve, or at least to maintain resource availability and capability, making their
livelihoods more sustainable.
Another principle assumed is the substitutability between environment (natural
capital) and stocks of man-made capital, which has been called weak sustainability.1
So, soil fertility deterioration/accumulation can be quantified through nutrient flows
and a monetary value given for the nutrient balance in order to express the value of
the natural capital consumed/added in the productive process.
How to approach to the methodology?
1
Weak sustainability considers that it can have lesser environment as long as increasing man-made
capital compensates this loss. This approach differs from the strong sustainability which considers
some functions and services of the ecosystems are essential to support life and human well being and
thus can not be ever completely replaced by technology (Turner et al, 1994; Hueting and Reijnders,
1998).
2
To calculate soil resource depreciation/appreciation and its impact on farmhousehold income, the methodology proposes a step-by-step approach. It involves
the physical and monetary assessment of nutrient flows. Primarily, natural and manmade processes affecting inflows and outflows of chemical components of cultivated
areas should be identified and quantified (Table 1). Natural input processes are
considered as important as man-made inflows, especially in low-input agricultural
systems (Moukoko and van der Pol, 1999).
Table 1:
Scheme of the type of INFLOWS and OUTFLOWS in the
NUTRIENT BALANCE
Nutrients Inflows
(Kg/Ha/Year)
Nutrients Outflows
(Kg/Ha/Year)
Natural Inflows
(Sediments)
Nitrogen Fixation
Nutrient Uptake
by Harvested Crops
Nutrient Uptake
in Residues
Losses by Erosion
Losses through
Leaching
Residues Restitution
Man-Made Inflows
(Fertiliser)
Afterwards, the fraction of chemical components of soil available to plants needs to
be identified. Following previous authors, van der Pol in 1992 maintains that
chemical elements are present in the soil in three different pools: either available for
plants, present in organic matter or as mineral reserves in the soil. Since fluxes
(exchanges between the chemical elements available to plants and those in the
organic matter) occur in a yearly cycle, they are both considered nutrients. To a great
extent they determine the fertility of the soil. It is estimated that over a period of 1020 years these two processes reach equilibrium. Elements in the mineral reserve or
irreversibly fixed are not accounted as nutrients (van der Pol, 1992).
Valuing nutrients in monetary terms
The balance for each component identified as plant nutrient is then calculated and
valued, based on current fertiliser market prices. The main assumption here is that
those elements available to plants as nutrients can be considered to have an economic
value. Nutrient balance per each element can be valued in monetary terms applying
the replacement costs. The replacement costs method states that damage to natural
resources should be repaired, returning them to their initial state in order to maintain
productivity. The nutrient balance for each element can result in depletion or
surplus, and is valued equal to the market value of an equivalent amount of fertiliser.
Thus, the sum of the nutrient balances for each element per hectare per crop and the
market prices of fertiliser are the key aspects of the valuation.
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Finally, the sum of all valued nutrients is compared with the conventional farmer
income. This value represents a sustainability ratio (SR) which relates the value of
nutrient depletion in a production system to the conventional net income (Moukoko,
2001). As an example, if the value of nutrient depletion in a production system
would amount to 25% of the conventional net income, the sustainability ratio would
be 0.75.
Integrating natural resources depreciation into economic accounting
In this approach, the core of the integration of environmental issues into economic
accounts is the inclusion of an allowance for depreciation of natural assets. The value
of this depreciation would equate to the resulting value of the nutrient balances in
monetary terms2. As when applied in the case of physical assets, the depreciation of
natural assets implies reserving a fixed allowance to ensure the sustainable use of the
services provided by the soil. Three kinds of statements are envisaged to integrate the
depreciation of natural assets: the integrated operating statement, the integrated
balance sheet and the integrated input-output statement.
The farm income level is represented by the conventional operating statement. Here
usually both the value of revenues and cash expenses, and the value of non-cash
expenses such as depreciation of buildings and machinery, are recorded. The
integrated operating statement adds the value of nutrient balance as a cost called
“nutrient substitution” or “allowance for nutrient replacement” (Table 2). In this way,
the costs and benefits of the farm business are expressed more accurately, and the
performance of the use of all capital resources, both physical and natural (in this case
soil), is assessed. As shown in Table 2, the value of the natural capital depreciation
was equivalent nearly to a third part of the gross income.
Other indicators resulting from the application of the method are also very useful
tools. Among them, to mention but a few, are: i) natural resources contribution index
(NRI), representing the relation between mined/added nutrients and the sum of
purchased fertiliser plus nutrient provided by nature; ii) added value with respect to
nutrients (AVN) which relates the value of all nutrients needed for the production of
one crop to the value of the produced crop; and iii) productivity foregone and
replacement cost ratio (PRR) which combines cost-benefit analysis and change in
productivity methods to relate the value of production which would be lost if the
replacement of lost nutrients were not undertaken and the cost which would be
actually incurred for the replacement (Moukoko, 2001).
2
Since the methodology was designed initially for valuing soil resources depletion, negative values are
assumed in the nutrient balances. Otherwise, positive values could not be considered always as
economically positive, because they may represent contamination or waste resources.
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Table 2:
Integrated Operating Statement (in US$ for farm model of 3 ha)
Items
Revenues
Sale of products
Other
Total revenues
Cash Expenses
Fertiliser
Seeds
Other
Total cash expenses
Income before depreciation
Non cash expenses - Depreciation allowances
Building and equipment
Net Income before allowance for nutrient
replacement
Allowance for nutrient replacement
Net adjusted (sustainable) income
Amount US$
480
120
600
70
15
40
125
475
80
395
150
245
Data and skills needed for implementing the methodology
The method requires information provided by different kinds of sources, as outlined
in table 2. Data on biophysical aspects of nutrient flows can be collected from a
literature review, whereas data on specific soil characteristics and natural or
agricultural deterioration are better gathered from specific studies in the region. More
specific information involving farming practices, cropping systems and economic
accounting needs to be collected through farmer interviews.
To fulfil accurately the data requirements of the methodology, it is advisable to
operate with an interdisciplinary team. Many data from literature reviews and in-situ
studies require considerable analysis and interpretation. In order to manage data
coming from different disciplines, it is highly advisable to combine the expertise of
soil scientists and socio-economists, together with extension agents. Once this
information has been analysed, the data entry does not require strong computer
knowledge and capabilities. The methodology uses a workbook spreadsheet in Excel
designed following the principles enunciated above. Specifications on how to enter
the information are contained in the workbook spreadsheet. It can function on any
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computer with Windows 95/Excel 4 or above. Skill requirements are minimal,
although it is important to have some knowledge or experience in using Excel.
Table 3:
Data requirements and sources of information
Farmers’ interviews
- Area under each crop
- Yield of crop
- Fertilizer and lime use
- Area under fallow
- Manure practice
- Grazing practice
- Residue restitution
practice
- Adaptations of cropping
systems to soil types
Specific in-situ studies
-Erosion rates and nutrient
content of eroded material
-Leaching losses
-N losses by denitrification
-Nutrient inputs by natural
processes (weathering,
atmospheric deposition, Nfixation and flooding)
Literature review
-Crop uptake of nutrients in
harvested product and
residues
-Nutrient content of
manure, compost and
excrement of cattle
3. Application of the Methodology
To illustrate practical aspects of this methodology, an example is presented from a
compilation study being performed in Colombia, to evaluate the usefulness and
effectiveness of the method. To undertake this study, national research and extension
institutions were selected with the expectation that they will adopt the methodology,
and further applications may be envisaged. A multidisciplinary team from the
National Corporation for Agricultural Research is in charge of developing the study.
The team has been dealing with economic valuation of soil conservation measures
and alternative proposals too.
Sites selection
A summary of the most important criteria that were taken into account in the
selection of the compilation sites in Colombia were as follows:
 The selected areas are representative of national agro-ecological systems in
geographical and biophysical terms (e.g. Colombia, Andean eco-systems with
high slope and strong soil deterioration)
 Smallholders or small-scale farmers are the predominant farming system within
the agro-ecological region.
 Erosion and soil depletion problems have been identified as very important
constraints for sustainable agriculture and farm families’ livelihoods.
 Better natural resource management has been designed and partly implemented
in the area by government or private initiatives.
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In Colombia, the selected areas, Salamaga and Guanentá-Comuneros, are located in the
east-Andean region, where smallholders with mixed agriculture predominate. Salamaga
watershed covers an area of 23,111 ha and the major land use is cropland and forests.
Altitude is between 1,400 and 2,300 meters above sea level. Smallholders cultivate
cassava, maize and beans in rotation systems. Guanentá-Comuneros occupies an area of
nearly 4,030 ha and is located between 600 and 1,400 meters above sea level. Main land
uses are cropland and forest. Smallholders have traditionally cultivated tobacco and started
diversification with beans.
Type of Outcomes
Examples of the outcomes produced by using the methodology are, first, nutrient
flows at the crop level for the most important elements (N, P, K, Ca, Mg, and S).
These are calculated in physical terms (nutrient inflow and outflow structures) and
monetary terms (valued nutrient inflow and outflow accounts). An aggregated value
of these outcomes per crop and per rotation system can be obtained. Finally, the
results of the nutrient balance at the farm level can be summarised. This information
alone offers relevant insights about nutrient and soil management and permits
decisions to be taken regarding crop selection and soil management.
Preliminary results from calculations on a rotation system in Santander, Colombia
illustrate the type of outcome that can be obtained (Figure 1). To interpret the results,
it is worth noting that the upper and the lower part of the pie chart each represent 100
percent of the inflow and outflow structure. The inflow structure (upper) may give an
indication of the relative importance of fertilisation in the maintenance of soil
fertility and, thus, the degree to which the production system is dependent on natural
or agricultural processes. The outflow structure may give an indication of the
efficiency of the cropping system, comparing the value of all nutrients needed for
crop production with the value of nutrients taken up by the harvested product. Also it
may give an indication of the value of mined nutrients and the relative importance,
within the avoidable losses, of preventing mining by implementing loss-reduction
measures.
According to the results, this production system presents a deficit of nearly 18
percent in the nutrient balance. This might be explained mainly by nutrient losses
due to erosion and, to a minor degree, by leaching. On the other side, residue
restitution plays the most important role acting as the main mechanism of nutrient
redeposition. Although very preliminary, the results give an indication of the extent
of soil mining associated with the production process as well as about a better
mechanism to overcome the negative balance.
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Valued Nutrient Flows (pesos) for Santander
(100 % = 271911 pesos/ha)
INFLOW
S
Residue restitution
(58%)
N-Fixation (2%)
Fertilizer (22%)
Deficit (18%)
Denitrification (4%)
Leaching/ fixation (9%)
Erosion (16%)
OUTFLOWS
Crop (71%)
Figure 1: Example of valued nutrient flow in monetary terms at the farm level,
Samaga watershed, Santander, Colombia, 2001.
4. Envisaged usefulness of the methodology and challenges in its
application
Although in a very preliminary stage, the pilot compilation cases provide already
some insights on the usefulness and constraints of the methodology. The views from
stakeholders in the pilot cases are summarised as follows:
Usefulness
To value efficiency and productivity in soil resources management and farming
systems: Analysing nutrient balance may provide useful insights to assess nutrient
and soil fertility management with implications for farming system efficiency.
Negative balances, as in the Colombian case, imply that the farming system is
producing crops and livestock by consuming the natural fertility, which most likely
implies further output decreases. Otherwise, the nutrient balance may be positive,
indicating accumulation of capital. However, a careful interpretation of the last result
is needed. So, should a positive nutrient balance be accompanied by high nutrient
losses due to erosion and/or leaching, they may indicate low efficiency in nutrient
management with high fertiliser costs and contamination problems.
To encourage farmers to adopt soil conservation and best agricultural practices:
Field and on-farm experiments on conservation technologies usually present higher
productivity compared with conventional ones. Using the methodology, the added
value in terms of nutrients that each technology offers can be shown in monetary
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terms. The results may serve to raise farmers’ awareness about the potential for
resource intensification using better agricultural practices.
To illustrate the value of environmental assets to decision-makers and politicians:
the quantification of outcomes may help to raise politicians’ awareness of the value
of environmental assets usually not visible from financial accounting alone. Policymakers and decision-makers could find support to justify projects for improved
nutrient management, soil conservation practices and best agriculture practices.
Challenges
Organic matter valuation: the methodology has not yet developed ways of valuing
the role that organic matter plays in the soil, for example, in forming soil structure.
Water valuation: at the moment, the methodology does not value water as a natural
capital asset at the farm level To incorporate intrinsic water value at the farm level
would entail an enormous amount of research and might be part of future activities
for AGSP-KIT.
Scaling up the results: integrating environment factors into economic accounts at
regional or national levels should be done, integrating other instruments such as
geographical information and modelling. Resources for this, however, are not yet
available.
Conclusions
Integrating environmental and economic accounts offers a unique opportunity to
appraise sustainable income at the farm level as well as to measure financial
contributions of environmental friendly technologies. The data and skills needed rely
more on interdisciplinary work to analyse and complement the information available.
Preliminary results from compilation sites show the usefulness of applying the
methodology in this paper for both introducing improved land management
technologies and assessing performance of farm resource efficiency.
Bibliography cited
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and Policy Vol. 1
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Moukoko-Ndoumbe F, (2001). Integrated Economic and Environmental
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Balances for Sustainable Production and Natural Resource Management in Southeast
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(AGSP), Food and Agriculture Organization of the United Nations (FAO).
Moukoko Ndoumbe F. and Van der Pol, F. (1999). Integrated Environmental and
Economic Accounting: Incorporating soil nutrient depletion in conventional farm
accounts. Working document (draft 10). Royal Tropical Institute (KIT), The
Netherlands and (AGSP -FAO).
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(2000) Integrated Environmental and Economic Accounting: An operational manual.
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Turner K., Pearce, D. and Bateman I. (1994). Environmental Economics: an
elementary introduction. UK.
Van der Pol, F. (1992). Soil mining. An unseen contributor of farm income in
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Corresponding Author Contact Information
Pilar Santacoloma, Farm Management and Production Economics, Food and
Agriculture Organization of the United Nations- Terme delle Caracalla, Rome, Italy,
Phone:06-57055837,FAX:06-57056799,Pilar.Santacoloma@fao.org, ORAL,
Farming System Knowledge and Information System
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