Advertisement

Annals of Operations Research

, Volume 255, Issue 1–2, pp 439–463 | Cite as

Managing soil natural capital: a prudent strategy for adapting to future risks

Article
  • 325 Downloads

Abstract

Farmers are exposed to substantial weather and market related risks. Rational farmers seek to avoid large losses. Future climate change and energy price fluctuations therefore make adaptating to increased risks particularly important for them. Managing soil natural capital—the capacity of the soil to generate ecosystem services of benefit to farmers—has been proven to generate the double dividend: increasing farm profit and reducing associated risk. In this paper we explore whether managing soil natural capital has a third dividend: reducing the downside risk (increasing the positive skewness of profit). This we refer to as the prudence effect which can be viewed as an adaptation strategy for dealing with future uncertainties through more prudent management of soil natural capital. We do this by developing a dynamic stochastic portfolio model to optimize the stock of soil natural capital—as indicated by soil organic carbon (SOC) content—that considers the mean, variance and skewness of profits from arable farming. The SOC state variable can be managed by the farmer only indirectly through the spatial and temporal allocation of land use. We model four cash crops and a grass ley that generates no market return but replenishes SOC. We find that managing soil natural capital can, not only improve farm profit while reducing the risk, but also reduce the downside risk. Prudent adaptation to future risks should therefore consider the impact of current agricultural management practices on the stock of soil natural capital.

Keywords

Adaptation strategy Mean–variance–skewness (MVS)  portfolio model Prudence Soil organic carbon Soil ecosystem services Sustainable agriculture 

Notes

Acknowledgments

This research is supported by the European Commission through the EcoFINDERS Project (FP7-264465), the Swedish Research Council Formas through the projects “Biodiversity and Ecosystem Services in a Changing Climate (BECC)” and “Sustainable Agriculture for the Production of Ecosystem Services (SAPES)”. We are grateful to the Swedish University of Agricultural Sciences (SLU) for access to data from the Scanian long-term field experiments that made this study possible.

References

  1. Adler, R. F., Gu, G., Wang, J. J., Huffman, G. J., Curtis, S., & Bolvin, D. (2008). Relationships between global precipitation and surface temperature on interannual and longer timescales (1979–2006). Journal of Geophysical Research: Atmospheres (1984–2012). doi: 10.1029/2008JD010536.
  2. AghaKouchak, A., Bárdossy, A., & Habib, E. (2010). Conditional simulation of remotely sensed rainfall data using a non-Gaussian v-transformed copula. Advances in Water Resources, 33(6), 624–634.CrossRefGoogle Scholar
  3. Agriwise. (2011). Agriwise—Data book for production planning and regional enterprise budgets. Uppsala: Department of Economics, Swedish University of Agricultural Sciences (SLU).Google Scholar
  4. Ajayi, O., Franzel, S., Kuntashula, E., & Kwesiga, F. (2003). Adoption of improved fallow technology for soil fertility management in Zambia: Empirical studies and emerging issues. Agroforestry Systems, 59(3), 317–326.CrossRefGoogle Scholar
  5. Altieri, M. A. (1999). The ecological role of biodiversity in agroecosystems. Agriculture, Ecosystems & Environment, 74(1), 19–31.CrossRefGoogle Scholar
  6. Barrios, E. (2007). Soil biota, ecosystem services and land productivity. Ecological Economics, 64(2), 269–285.CrossRefGoogle Scholar
  7. Bationo, A., Kihara, J., Vanlauwe, B., Waswa, B., & Kimetu, J. (2007). Soil organic carbon dynamics, functions and management in West African agro-ecosystems. Agricultural Systems, 94(1), 13–25. doi: 10.1016/j.agsy.2005.08.011.CrossRefGoogle Scholar
  8. Boardman, J., & Poesen, J. (2006). Soil erosion in Europe. New York: Wiley.CrossRefGoogle Scholar
  9. Bommarco, R., Kleijn, D., & Potts, S. G. (2013). Ecological intensification: Harnessing ecosystem services for food security. Trends in Ecology & Evolution, 28(4), 230–238.CrossRefGoogle Scholar
  10. Brady, M., Hedlund, K., Cong, R.-G., Hemerik, L., Hotes, S., Machado, S., et al. (2015). Valuing supporting soil ecosystem services in agriculture: A natural capital approach. Agronomy Journal, 107(5), 1809–1821. doi: 10.2134/agronj14.0597.CrossRefGoogle Scholar
  11. Burt, O. R. (1981). Farm level economics of soil conservation in the Palouse area of the Northwest. American Journal of Agricultural Economics, 63(1), 83–92.CrossRefGoogle Scholar
  12. Capriel, P. (2013). Trends in organic carbon and nitrogen contents in agricultural soils in Bavaria (south Germany) between 1986 and 2007. European Journal of Soil Science, 64(4), 445–454.CrossRefGoogle Scholar
  13. Carlgren, K., & Mattsson, L. (2001). Swedish soil fertility experiments. Acta Agriculturae Scandinavica, Section B-Plant Soil Science, 51(2), 49–76.Google Scholar
  14. Choi, J.-S., & Helmberger, P. G. (1993). How sensitive are crop yields to price changes and farm programs? Journal of Agricultural and Applied Economics, 25(01), 237–244.CrossRefGoogle Scholar
  15. Christensen, B. T., Rasmussen, J., Eriksen, J., & Hansen, E. M. (2009). Soil carbon storage and yields of spring barley following grass leys of different age. European Journal of Agronomy, 31(1), 29–35.CrossRefGoogle Scholar
  16. Cong, R.-G., & Brady, M. (2012a). How to design a targeted agricultural subsidy system: Efficiency or equity? PloS One. doi: 10.1371/journal.pone.0041225.
  17. Cong, R.-G., & Brady, M. (2012b). The interdependence between rainfall and temperature: copula analyses. The Scientific World Journal, 2012. doi: 10.1100/2012/405675.
  18. Cong, R.-G., Hedlund, K., Andersson, H., & Brady, M. (2014a). Managing soil natural capital: an effective strategy for mitigating future agricultural risks? Agricultural Systems, 129, 30–39.Google Scholar
  19. Cong, R.-G., Smith, H. G., Olsson, O., & Brady, M. (2014b). Managing ecosystem services for agriculture: Will landscape-scale management pay? Ecological Economics, 99, 53–62.CrossRefGoogle Scholar
  20. Dai, A., Trenberth, K. E., & Karl, T. R. (1999). Effects of clouds, soil moisture, precipitation, and water vapor on diurnal temperature range. Journal of Climate, 12(8), 2451–2473.CrossRefGoogle Scholar
  21. de Ruiter, P. C., Neutel, A.-M., Moore, J. (2005). The balance between productivity and food web structure in soil ecosystems. In R. D. Bardgett, M. B. Usher, D. W. Hopkins (eds.), Biological diversity and Function in Soils (pp. 139–153), Cambridge: Cambridge University Press.Google Scholar
  22. De Wit, Ad, Boogaard, H., & Van Diepen, C. (2005). Spatial resolution of precipitation and radiation: The effect on regional crop yield forecasts. Agricultural and Forest Meteorology, 135(1), 156–168.CrossRefGoogle Scholar
  23. Del Grosso, S., Ojima, D., Parton, W., Mosier, A., Peterson, G., & Schimel, D. (2002). Simulated effects of dryland cropping intensification on soil organic matter and greenhouse gas exchanges using the DAYCENT ecosystem model. Environmental Pollution, 116, S75–S83.CrossRefGoogle Scholar
  24. Di Falco, S., & Chavas, J.-P. (2008). Rainfall shocks, resilience, and the effects of crop biodiversity on agroecosystem productivity. Land Economics, 84(1), 83–96.CrossRefGoogle Scholar
  25. Di Falco, S., & Chavas, J.-P. (2009). On crop biodiversity, risk exposure, and food security in the highlands of Ethiopia. American Journal of Agricultural Economics, 91(3), 599–611.CrossRefGoogle Scholar
  26. Dogliotti, S., Rossing, W., & Van Ittersum, M. (2004). Systematic design and evaluation of crop rotations enhancing soil conservation, soil fertility and farm income: a case study for vegetable farms in South Uruguay. Agricultural Systems, 80(3), 277–302.CrossRefGoogle Scholar
  27. Duquette, E., Higgins, N., & Horowitz, J. (2011). Farmer discount rates: Experimental evidence. American Journal of Agricultural Economics, 94, 451–456.CrossRefGoogle Scholar
  28. European Commission (2014a). Agricultural and rural development Taking care of our roots. http://ec.europa.eu/agriculture/cap-for-our-roots/index_en.htm. Accessed 07 September 2015.
  29. European Commission (2014b). The Common Agriculture Policy after 2013. http://ec.europa.eu/agriculture/cap-post-2013/. Accessed 07 September 2015.
  30. Figge, F. (2004). Bio-folio: Applying portfolio theory to biodiversity. Biodiversity & Conservation, 13(4), 827–849.CrossRefGoogle Scholar
  31. Foudi, S., & Erdlenbruch, K. (2011). The role of irrigation in farmers’ risk management strategies in France. European Review of Agricultural Economics. doi: 10.1093/erae/jbr024.
  32. Gardner, B. L. (1976). Futures prices in supply analysis. American Journal of Agricultural Economics, 58(1), 81–84.CrossRefGoogle Scholar
  33. Gill, S., Vasanthan, T., Ooraikul, B., & Rossnagel, B. (2002). Wheat bread quality as influenced by the substitution of waxy and regular barley flours in their native and extruded forms. Journal of Cereal Science, 36(2), 219–237. doi: 10.1006/jcrs.2001.0458.CrossRefGoogle Scholar
  34. Guto, S. N., Pypers, P., Vanlauwe, B., de Ridder, N., & Giller, K. E. (2011). Tillage and vegetative barrier effects on soil conservation and short-term economic benefits in the Central Kenya highlands. Field Crops Research, 122(2), 85–94. doi: 10.1016/j.fcr.2011.03.002.CrossRefGoogle Scholar
  35. Hao, Z., AghaKouchak, A., & Phillips, T. J. (2013). Changes in concurrent monthly precipitation and temperature extremes. Environmental Research Letters, 8(3), 034014.CrossRefGoogle Scholar
  36. Held, R. B., & Clawson, M. (2013). Soil conservation in perspective (Vol. 4). London: Routledge.Google Scholar
  37. Herrick, J. E., & Wander, M. M. (1997). Relationships between soil organic carbon and soil quality in cropped and rangeland soils: the importance of distribution, composition, and soil biological activity. Boca Raton: CRC Press.Google Scholar
  38. Howden, S. M., Soussana, J.-F., Tubiello, F. N., Chhetri, N., Dunlop, M., & Meinke, H. (2007). Adapting agriculture to climate change. Proceedings of the National Academy of Sciences, 104(50), 19691–19696.CrossRefGoogle Scholar
  39. Kareiva, P., Tallis, H., Ricketts, T. H., Daily, G. C., & Polasky, S. (2011). Natural capital: Theory and practice of mapping ecosystem services. Oxford: Oxford University Press.CrossRefGoogle Scholar
  40. Kimball, M. S. (1990). Precautionary saving in the small and in the large. Econometrica: Journal of the Econometric Society, 58(1), 53–73.Google Scholar
  41. Knutson, C., Hayes, M., & Phillips, T. (1998). How to reduce drought risk. http://drought.unl.edu/portals/0/docs/risk.pdf. Accessed 17 Nov 2015.
  42. Koch, R. (2011). The 80/20 principle: The secret to achieving more with less. New York: Random House LLC.Google Scholar
  43. Koellner, T., & Schmitz, O. J. (2006). Biodiversity, ecosystem function, and investment risk. BioScience, 56(12), 977–985.CrossRefGoogle Scholar
  44. Koundouri, P., Laukkanen, M., Myyrä, S., & Nauges, C. (2009). The effects of EU agricultural policy changes on farmers’ risk attitudes. European Review of Agricultural Economics. doi: 10.1093/erae/jbp003.
  45. Kätterer, T., Bolinder, M. A., Andrén, O., Kirchmann, H., & Menichetti, L. (2011). Roots contribute more to refractory soil organic matter than above-ground crop residues, as revealed by a long-term field experiment. Agriculture, Ecosystems & Environment, 141(1), 184–192.CrossRefGoogle Scholar
  46. Lal, R. (2004). Soil carbon sequestration impacts on global climate change and food security. Science, 304(5677), 1623–1627.CrossRefGoogle Scholar
  47. Lal, R. (2006). Enhancing crop yields in the developing countries through restoration of the soil organic carbon pool in agricultural lands. Land Degradation & Development, 17(2), 197–209.CrossRefGoogle Scholar
  48. Lavelle, P., Decaëns, T., Aubert, M., Barot, S., Blouin, M., Bureau, F., et al. (2006). Soil invertebrates and ecosystem services. European Journal of Soil Biology, 42, S3–S15.CrossRefGoogle Scholar
  49. Li, Y. L., McAllister, T. A., Beauchemin, K. A., He, M. L., McKinnon, J. J., & Yang, W. Z. (2011). Substitution of wheat dried distillers grains with solubles for barley grain or barley silage in feedlot cattle diets: Intake, digestibility, and ruminal fermentation. Journal of Animal Science, 89(8), 2491–2501. doi: 10.2527/jas.2010-3418.CrossRefGoogle Scholar
  50. Lien, D., & Yu, C. F. J. (2014). Production and anticipatory hedging under time-inconsistent preferences. Journal of Futures Markets, 35(10), 961–985.Google Scholar
  51. Liu, C., Allan, R. P., & Huffman, G. J. (2012). Co-variation of temperature and precipitation in CMIP5 models and satellite observations. Geophysical Research Letters. doi: 10.1029/2012GL052093.
  52. Mace, G. M., Norris, K., & Fitter, A. H. (2012). Biodiversity and ecosystem services: A multilayered relationship. Trends in Ecology & Evolution, 27(1), 19–26.CrossRefGoogle Scholar
  53. Mao, J. C. (1970). Survey of capital budgeting: Theory and practice. The Journal of Finance, 25(2), 349–360.CrossRefGoogle Scholar
  54. Matson, P. A., Parton, W. J., Power, A., & Swift, M. (1997). Agricultural intensification and ecosystem properties. Science, 277(5325), 504–509.CrossRefGoogle Scholar
  55. Mitra, S., & Boussard, J. M. (2012). A simple model of endogenous agricultural commodity price fluctuations with storage. Agricultural Economics, 43(1), 1–15.CrossRefGoogle Scholar
  56. Nandwa, S. (2001a). Soil organic carbon (SOC) management for sustainable productivity of cropping and agro-forestry systems in Eastern and Southern Africa. Managing organic matter in tropical soils: Scope and limitations (pp. 143–158). Berlin: Springer.CrossRefGoogle Scholar
  57. Nandwa, S. (2001b). Soil organic carbon (SOC) management for sustainable productivity of cropping and agro-forestry systems in Eastern and Southern Africa. In C. Martius, H. Tiessen, & P. L. G. Vlek (Eds.), Managing organic matter in tropical soils: Scope and limitations. Developments in Plant and Soil Sciences (Vol. 93, pp. 143–158). Netherlands: Springer.Google Scholar
  58. Pulleman, M., Creamer, R., Hamer, U., Helder, J., Pelosi, C., Peres, G., et al. (2012). Soil biodiversity, biological indicators and soil ecosystem services—an overview of European approaches. Current Opinion in Environmental Sustainability, 4(5), 529–538.CrossRefGoogle Scholar
  59. Racsko, P., Szeidl, L., & Semenov, M. (1991). A serial approach to local stochastic weather models. Ecological Modelling, 57(1), 27–41.CrossRefGoogle Scholar
  60. Reeves, D. (1997). The role of soil organic matter in maintaining soil quality in continuous cropping systems. Soil and Tillage Research, 43(1), 131–167.CrossRefGoogle Scholar
  61. Richardson, C. W. (1981). Stochastic simulation of daily precipitation, temperature, and solar radiation. Water Resources Research, 17(1), 182–190.CrossRefGoogle Scholar
  62. Samuelson, P. A. (1970). The fundamental approximation theorem of portfolio analysis in terms of means, variances and higher moments. The Review of Economic Studies, 37(4), 537–542.Google Scholar
  63. Saxton, K., & Rawls, W. (2006). Soil water characteristic estimates by texture and organic matter for hydrologic solutions. Soil Science Society of America Journal, 70(5), 1569–1578.CrossRefGoogle Scholar
  64. SCB. (2012). Jordbrukstatistik årsbok 2012 (Yearbook of agricultural statistics 2012). Örebro: Statistics Sweden.Google Scholar
  65. Schlenker, W., & Roberts, M. J. (2009). Nonlinear temperature effects indicate severe damages to US crop yields under climate change. Proceedings of the National Academy of Sciences, 106(37), 15594–15598.CrossRefGoogle Scholar
  66. Singh, S. K., Singh, A. K., Sharma, B. K., & Tarafdar, J. C. (2007). Carbon stock and organic carbon dynamics in soils of Rajasthan, India. Journal of Arid Environments, 68(3), 408–421. doi: 10.1016/j.jaridenv.2006.06.005.CrossRefGoogle Scholar
  67. Smit, B., & Skinner, M. W. (2002). Adaptation options in agriculture to climate change: A typology. Mitigation and Adaptation Strategies for Global Change, 7(1), 85–114.CrossRefGoogle Scholar
  68. Smit, B., & Wandel, J. (2006). Adaptation, adaptive capacity and vulnerability. Global Environmental Change, 16(3), 282–292.CrossRefGoogle Scholar
  69. Snapp, S., Blackie, M., & Donovan, C. (2003). Realigning research and extension to focus on farmers’ constraints and opportunities. Food Policy, 28(4), 349–363.CrossRefGoogle Scholar
  70. Thrupp, L. A. (2000). Linking agricultural biodiversity and food security: The valuable role of agrobiodiversity for sustainable agriculture. International Affairs, 76(2), 283–297.CrossRefGoogle Scholar
  71. Tilman, D., Cassman, K. G., Matson, P. A., Naylor, R., & Polasky, S. (2002). Agricultural sustainability and intensive production practices. Nature, 418(6898), 671–677.CrossRefGoogle Scholar
  72. Trenberth, K. E., & Shea, D. J. (2005). Relationships between precipitation and surface temperature. Geophysical Research Letters. doi: 10.1029/2005GL022760.
  73. Weitzman, M. L. (2000). Economic profitability versus ecological entropy. Quarterly Journal of Economics, 115(1), 237–263.Google Scholar
  74. West, T. O., & Post, W. M. (2002). Soil organic carbon sequestration rates by tillage and crop rotation. Soil Science Society of America Journal, 66(6), 1930–1946.CrossRefGoogle Scholar
  75. Zdruli, P., Calabrese, J., Ladisa, G., & Otekhile, A. (2014). Impacts of land cover change on soil quality of manmade soils cultivated with table grapes in the Apulia Region of south-eastern Italy. Catena, 121, 13–21. doi: 10.1016/j.catena.2014.04.015.CrossRefGoogle Scholar
  76. Zdruli, P., Eswaran, H., & Kimble, J. (1995). Organic carbon content and rates of sequestration in soils of Albania. Soil Science Society of America Journal, 59(6), 1684–1687.CrossRefGoogle Scholar
  77. Zhu, Y., Ghosh, S. K., & Goodwin, B. K. (2008). Modeling dependence in the design of whole-farm insurance contract: A copula-based model approach. In Annual meetings of the American Agricultural Economics Association, Orlando, FL, 2008 (pp. 27–29).Google Scholar

Copyright information

© Springer Science+Business Media New York 2015

Authors and Affiliations

  • Rong-Gang Cong
    • 1
    • 2
  • Mette Termansen
    • 1
  • Mark V. Brady
    • 2
    • 3
  1. 1.Department of Environmental ScienceAarhus UniversityRoskildeDenmark
  2. 2.Centre for Environmental and Climate Research (CEC)Lund UniversityLundSweden
  3. 3.AgriFood Economics Centre, Department of EconomicsSwedish University of Agricultural SciencesLundSweden

Personalised recommendations