The impact of cover crops on farm finance and risk: insights from Indiana farm data using econometric and stochastic methods

For agricultural soils to be perpetually productive, farmers must maintain and improve the physical, chemical, and biological properties of the soil. The loss of soil to erosion is a major challenge to soil health, contributing to farmland loss and declines in productivity. This is a long-term problem for agriculture because there is a limited amount of topsoil available. Another costly loss happens when residual nitrogen is lost to leaching or carried away in runoff. This is a particular problem in the fall and winter months when fields lie fallow, and there are no plants to take up excess nitrogen. Losing nitrogen is a problem for both the nutrient content of the soil as well as a serious concern in terms of water contamination. Cover crops provide a way to at least partially address each of these and many other agronomic and soil health issues. Although there has been a steady increase in cover crop use, adoption has been relatively slow. This is likely due to a lack of economic information and understanding of the associated risk. To address this problem, field level data was gathered from farmers across central and northeastern Indiana. The data included information on cash crop yield, cover crops grown, fertilizer use, among many other variables. The sample was trimmed based on the estimated propensity to cover crop, in order to reduce selection bias. Using this data, the effect of cover crops on the mean and variation of the subsequent cash crop yield was estimated using regression analysis. This information was combined in a stochastic analysis of a farm enterprise budget. The effects of cover crops on farm finance and risk were evaluated. These final analyses provide agricultural producers with more information to make informed decisions regarding the adoption of cover crops. The information may also provide insight to policy makers, who may wish to understand more completely the private economics of cover crops. The results indicated that cover crops have the ability to provide economic benefits when grown prior to corn in our study region. These include increased yield, reduced need for nitrogen fertilizer, and increased temporal yield stability. These benefits translate into higher revenue from the sale of the grain, lower input costs, and lower risk and uncertainty. However, the results for soybeans showed cover crops had a negative, albeit statistically insignificant, effect on desirable measures. This led to lower projected revenue, higher projected costs, and increased expected risk. Even so, the average corn-soybean contribution margin with cover crops was nearly equal to the baseline scenario. Furthermore, the analysis of risk showed that the corn-soybean two-year average would be preferred by farmers with moderate to high risk aversion. The difference between the effect of cover crops in corn and soybeans may be due to differences in the crop’s inherent nitrogen needs and the difficulty of cover crop establishment after corn in the region.