The Economics of Windbreak Renovation

Mamane Annou and Glenn Pederson

Farmers and others who remember the Dust Bowl in the 1930s may still have a high regard for field windbreaks--rows of trees and shrubs planted to control wind damage. In the 1930s, new windbreaks were established throughout the northern Great Plains to reduce soil loss and improve soil productivity. Today, about 54,000 miles of these windbreaks remain in Minnesota, North Dakota, and South Dakota, but that number is steadily declining. Of this total, Minnesota accounts for only 5,000 miles, located primarily in the Red River Valley. All other states combined have 42,000 miles of windbreaks.

Windbreaks have multiple uses and provide multiple private and social benefits. They protect field crops during the growing season, enhance moisture by controlling snow distribution, and provide a habitat for wildlife. In addition, windbreaks provide attractive landscapes in rural areas.

Field windbreaks, however, are costly to establish, and equally costly to maintain and renovate. Windbreaks are becoming less effective at sheltering crops and controlling moisture because older windbreaks are losing trees that are not being replaced. For example, a survey conducted in 1979 found that 21 percent of windbreaks needed renovation and that, among windbreaks that were over 50 years old, one out of two were being removed and would not be replaced. Based on a similar survey done in 1992, we estimate that 70–90 percent of windbreaks in North and South Dakota need renovation.

For more than 60 years, government programs encouraged the planting of windbreaks by sharing the costs of acquiring and planting new trees. Currently, the Environmental Quality Incentive Program (EQIP) and the Stewardship Incentive Program (SIP) are the most comprehensive subsidy programs available to farmers who elect to invest in their windbreaks. Under EQIP, a voluntary program that promotes the environmental benefits of conservation projects including windbreak renovation, successful applicants receive 75 percent of renovation costs, up to $10,000 per applicant per year. SIP, which encourages conservation practices that enhance wildlife habitat, increase recreation opportunities, or increase the supply of forest products, provides for a refund of 50–75 percent of the cost of windbreak renovation.

But, even with this level of assistance, does it make financial sense for a farmer to restore field windbreaks? Based on the costs of renovation and the cost-sharing incentives that are currently available, we evaluated representative windbreak renovation plans from the perspective of a farmer or other landowner. Conceptually, the decision to renovate a field windbreak is a capital investment decision (much like other farm improvements). Thus, we use a discounted net present value (NPV) approach to identify the factors that might inhibit farmers from renovating their windbreaks.

Deciding Whether and How to Renovate

In our stylized decision environment, we assume that the farmer’s objective is to choose the renovation plan that maximizes the NPV of private net benefits. Similarly, society seeks to maximize the social net benefits of field windbreaks and encourages renovation by providing technical assistance and funding programs that extend cost-share payments to participating farmers. (We assume that the social benefits have already been determined to be sufficient to justify the cost-share subsidy in the first place.)

A farmer may decide to either renovate the windbreak or do nothing (that is, abandon it). The farmer’s decision to renovate requires that he or she identifies the NPV of each renovation plan--subject to budget constraints. Because the alternative plans are mutually exclusive, the standard investment decision rule is to select the windbreak renovation plan that generates the highest positive NPV.

The cost of renovation depends on, to a significant degree, the initial physical characteristics of the existing windbreak, the desired level of protection, and the provisions of the cost-share program. We identified four categories of incremental cost associated with the decision to renovate:

• the cost of clearing away the old rows of trees,
• the cost of planting new trees,
• the cost of maintaining the new windbreak, and
• the opportunity cost of the land on which the windbreak is located.

Clearing consists of removing the decayed rows of trees, disposing of the debris, and leveling the site. Planting includes the selection of tree species and spacing specifications to achieve the desired density of vegetation in the windbreak. And once planted, trees may require periodic maintenance such as pruning. A good renovation plan may include costs associated with using plastic to conserve moisture and herbicide to control weeds in the rows. With the exception of herbicide treatments, farmers typically contract out the renovation work, and many farmers apply for cost-share payments.

If a loan is obtained to finance the renovation, the interest cost is part of the cost of renovation. Noncash expenses are also typically incurred. For example, farmers are prohibited from cropping the area devoted to the new windbreak. Thus, the value of foregone production is an opportunity cost (assuming that crop production is the next-best use of the land).

On the benefit side, farmers expect that, by protecting crops, windbreaks will lead to an increase in crop yields in adjoining fields. Faster tree growth provides earlier crop protection--and higher yields. The expected increase in crop yields and the area protected by the windbreak combine to generate a stream of private benefits (positive net cash flows) that enter into the decision to renovate.

While a renovation project involves immediate cash outlays, most of the benefits are realized only in the future. Thus, it is important that we discount all the costs and benefits to a reference point in time (such as today) in order to determine the NPV of each renovation plan. Once all the alternative plans are expressed in these terms, the farmer can select and implement the renovation plan that achieves the highest positive value.

Generally, cost-share programs are intended to promote renovation plans that produce environmental benefits. By reducing out-of-pocket costs, cost-sharing programs improve the NPV of a windbreak and make its renovation more attractive to the farmer. It also induces the adoption of renovation plans that are assumed to be socially desirable. (Cost-share programs would be inefficient, of course, if the subsidy exceeds the social benefits of renovation. Alternatively, if the cost-share subsidy were too low to induce a farmer to engage in a renovation, the result would also be inefficient.)

Defining the Best Clearing/Planting Plan for Windbreak Renovation

In order to evaluate alternative windbreak renovation plans, we simulated the costs and benefits associated with renovating an existing quarter-mile, three-row field windbreak--a typical northern Great Plains windbreak. Our simulated windbreak is 33 feet wide and occupies an acre of land. In this analysis, we assume that

• the old windbreak has declined to 75 percent of its mature height and will become totally ineffective in 10 years from today; and
• a totally new windbreak or row of trees within the windbreak, if planted today, will become fully effective in 10 years and will protect the field for another 40 years thereafter.

Although uncertainty is an important consideration in any investment decision, we conducted our analysis under conditions of certainty (except for the discount rate) to emphasize the trade-offs that are involved. In our model, four variables are of particular interest:

• the area of cropland protected,
• the cost of renovating the windbreak,
• the yield increase that results from crops being protected by the windbreak, and
• the discount rate.

Based on assumptions (not reported here) about windbreak structure and farm crop rotation, we calculated the cash flows associated with the various windbreak clearing and planting scenarios shown in table 1. Our model assumes crop yields increase in proportion to the amount of protection they receive from the windbreak. For example, the yield of winter wheat per acre is assumed to increase by 23 percent in response to windbreak protection. A 10-year average yield and a three-year average market price of winter wheat were used in the analysis. Crop market prices were assumed to remain constant at the current expected level over the planning horizon (that is, crop prices are assumed constant in real terms). The costs of renovation activities were set at the rates published by the Natural Resource Conservation Service. Cost-share rates were taken from the EQIP program in North Dakota. A real interest rate of 6.5 percent was used to reflect the farmer’s real interest rate on a long-term loan. And a real discount rate of 6.87 percent was used to calculate the present value of the renovation cash flows. For simplicity, we ignored the effects of taxes and depreciation.

Evaluating Multiple Renovation Plans

Of the 16 possible renovation plans we examined, five are profitable (that is, have positive NPVs), and 11 plans are unprofitable, as shown in table 1, when we include existing subsidies. All plans are based on the existing three-row windbreak described above. The three profitable plans (those with the highest NPVs) are:

• Clear no rows and plant no rows.
• Clear two rows and plant one row.
• Clear one row and plant one row.

Table 1 shows that renovation plans that involve replanting multiple rows are not as efficient as plans that call for replanting just a single row. The "clear no rows and plant no rows" plan represents an abandonment strategy where the windbreak is left to deteriorate. The other two plans (both consisting of partial removal and replanting) are more profitable than abandoning the windbreak.

The best renovation plan when accounting for existing subsidies, then, is to clear two rows and plant one row. This plan is better than abandonment, which involves an opportunity cost of land without providing crop benefits because protection ceases with the useful life of the existing windbreak. Interestingly, the abandonment strategy is still financially more attractive than renovation plans that involve total clearing (with no replanting) or replanting a multiple-row windbreak. The reason for this is that abandonment delays the costs of renovation and only incurs a gradually increasing penalty (in terms of reduced crop protection) as the windbreak ages--even though clearing the windbreak without replanting would bring more land into production.

If the farmer replants more than a single row, additional costs are incurred. For example, the "clear two rows and plant two rows" plan would lead to a loss of $963 ($616 + $347). This reduction of profitability is one estimate of the additional subsidy that society would need to pay in order to induce this farmer to replant two rows of trees when removing old windbreaks.

Historically, the objective of cost-share programs was to encourage windbreak renovation by reducing the initial cost of investing in windbreaks. The relevant question is, are the cost-share payments under current programs sufficient to make up the cost of deviating from the farmer’s desired renovation plan?

The relevant plan for this evaluation of existing cost-share programs is not the "clear two rows replant one row" plan chosen above. To examine the effectiveness of existing subsides, we need to compare them to the costs incurred by deviating from the best plan when there are no subsidies. Table 2 shows the NPV of returns without a subsidy. For the "clear two rows" option, the desired plan, that is, the plan with the highest NPV, is "replant zero rows." To induce the farmer to replant two rows (instead replanting zero rows--the preferred plan), the government would need to pay him or her $2,389 ($147 + $2,242).

These subsidies appear to be sizable when compared to the amount of money a farmer can receive from current cost-share programs. In table 3, we report the present value of existing cost-share payments associated with alternative renovation plans for our hypothetical windbreak, and in figure 1 we diagram these compared to the cost of alternative renovation plans that involve replanting 0–3 rows of trees. For each planting option, the "cost" shown is the amount of money lost by following that plan compared to the desired "replant zero rows" plan.

Figure 1. Current subsidies generally do not cover the cost of deviating from the preferred zero-subsidy renovation plan

Thus, we see, for example, that the current level of cost-share payments are just sufficient to induce replanting using one-row windbreaks because the amount of the cost-share payment just covers the cost of deviating from the preferred zero-replant plan. To the right of the one-row planting point in figure 1, however, existing cost-share payments fall short of covering the cost of deviating from the efficient plan. The vertical distance between the two lines is the "subsidy gap" (or surplus, for the one-row option).

Although these results are based on a model with several simplifying assumptions, the implications are clear. Under the current cost-share program, field windbreaks will continue to evolve toward single-row plantings--even if multiple-row renovation happens to be more socially desirable.

No Subsidy, No Renovation

We started our research by assuming that the profitability of windbreak renovation is a function of the windbreak’s initial condition, renovation cost, crop yield response to protection, land saving, and cost-share payments. Our analysis shows that if replanting is at all profitable in such situations, a farmer is likely to choose a single-row windbreak renovation plan to replace an existing multiple-row windbreak. This result holds true even when a variety of alternative courses of action are considered. Our results show that when farmers decide to renovate a windbreak, two main factors influence their decision; the increased crop yields a windbreak provides, and the amount of productive land freed up by replanting fewer rows. What do these results tell us about cost-share programs?

Our analysis suggests that critical windbreak renovation is not profitable unless the farmer receives cost-share payments. However, the existing cost-share payments currently available to farmers are sufficient only to induce renovations that use a single row of trees. (A farmer, of course, may elect to replace an existing windbreak with multiple rows, but that decision would likely be motivated by considering other benefits that are not reflected in our investment profitability analysis.) Economic logic also suggests that reno- vation is more costly if the farmer waits until the windbreak is at the end of its useful life (and there is no remaining protection value) because it takes time to establish a replacement windbreak. A dead windbreak is more likely to be abandoned or cleared, and not replaced.

In conclusion, the cost-share programs currently in place may be ineffective in sustaining the existing multiple-row field windbreaks that we find today across the northern Great Plains.

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