Heavy rainfall and subsequent flooding in the summer of 1993 caused significant damage on many Kansas farms. Now farmers must decide whether to repair (remediate) this damage to prepare for next year’s production and before further erosion occurs.  The purpose of this fact sheet is to explain the  types of economic costs and benefits associated with land remediation and then present a simple worksheet for comparing these costs and benefits.

What types of remediation do you need?

The types of remediation activities needed to restore the productivity of agricultural lands will naturally depend on the nature of the damage. For example, heavy sand deposits may need to be plowed.  Land leveling and shaping will be needed to fill in gullies; fences may need to be replaced and debris may need to be removed.

As you assess your own situation, make a list of the types of remediation activities you will need, their costs, and the number of acres they will cover. You may need an opinion from an engineer, contractor, or other specialist for some of the major land moving activities.

What help is available from the government?

Federal government assistance is available for individuals under at least two programs. The first is the Wetlands Reserve Program. Under this program, the government purchases permanent easements on lands that have previously been designated as wetlands, to restore them to their “natural state” to reduce future potential erosion. In return for a onetime payment, the land owner agrees never to use the land for any agricultural purpose again. The land may be used for recreation and fee hunting, and the easement does not allow public access. The terms typically require establishing and maintaining a cover—trees, grass, etc.—on the land.

The second program, the Emergency Conservation Program, is designed to restore land to agricultural production, which is the focus of this discussion. To qualify for federal cost share assistance, remediation costs must amount to less than one-half of the original value of the land. 

For example, land that was valued at $1,000 per acre prior to being damaged can receive federal cost share assistance if remediation activities cost less than $500 per acre. If the land does qualify, the federal government will pay 60 percent of the remediation costs. Contact your local Soil Conservation Service (SCS) and Agricultural Stabilization and Conservation Service (ASCS) offices for more details on this program.

What are the benefits of land remediation?

Several benefits can result from land remediation.  First, restoring the productivity of the land  produces higher crop yields. Thus, higher sales revenue could be expected every year once remediation occurs. But how should we compare benefits accruing in future years with the remediation costs occurring today? First, think of these future income streams like payments of an annuity.

We can calculate an amount, the present value, which we could receive today that would be an investment equivalent to the annuity payments in the future. That is, we would be indifferent between receiving a given amount now (the present value) and the series of annuity payments in the future. Or, just think of calculating present values as compounding interest in reverse. The present value of these future crop sales is clearly a benefit of remediation.

Note that the present value depends on several factors, the most obvious being the amount of the cash flow itself. It also depends on the discount rate, or interest rate. Finally, the present value also depends on the time horizon—that is, how far in the future the cash flow actually occurs.

Second, remediating damaged land can affect input costs. For example, leaving a layer of sand on the surface of the land may require more fertilizer to produce a crop; plowing the sand under would save these added costs. 

Note, however, that a savings might not occur for every type of input. For example, if the restored land would be irrigated while the unrestored land would not, extra input costs are actually incurred by going ahead with remediation. Because changes in input costs also occur every year, their present value needs to be calculated in the same way as the present value of additional future crop sales.

A third benefit results from restoring the land’s market value. Suppose you plan to retire and sell the land 10 years from now, and that remediation would increase the land’s value by an additional $150 per acre. This is a substantial future benefit, for which we can also calculate a present value. However, this type of benefit will be less important for landowners who have no plans to sell their land any time soon, since cash flows occurring far in the future have a relatively smaller present value.

What are the costs of land remediation?

Remediation costs include the costs of activities needed to restore the land to production, as described earlier. These activities can include such things as plowing, land leveling and shaping, repairing fences, and removing debris. If the land qualifies for federal cost sharing, the net cost to the farmer will be 40 percent of the total.

Restoring the land’s value may also have an effect on its property taxes, since remediation would increase the property’s value and hence one’s property taxes. However, the change in taxes will probably be quite small in comparison to the other costs and benefits of remediation.

A worksheet for comparing costs and benefits of land remediation

The Kansas State University Cooperative Extension Service has developed a worksheet for comparing the costs and benefits of land remediation, as described in this fact sheet. Table 1 shows an example of this worksheet for a hypothetical situation.

In the example, Joe Farmer had some serious damage on the property he calls the North 40. After consulting a contractor, he discovered that effective remediation would require some deep plowing, land leveling, and debris removal. These costs are listed on lines 1 through 5 in Section A on the worksheet. For the deep plowing, it will take three bulldozers, each charging $85 per hour. It takes them 1.2 hours to plow 1 acre, resulting in a total cost per acre of $306. Land leveling and debris removal costs are listed in the same section. Line 6 shows the total remediation cost per acre as $386.

Does this qualify for cost-sharing from the government?  The initial value of the land was $900 per acre (Line 7), so the maximum remediation cost to qualify for cost sharing is $450 (Line 8). Joe qualifies since the estimated remediation cost per acre is $386. Thus, he has to pay only 40 percent of the remediation costs, making his cost $154 per acre (Line 6).

Lines 9 through 14 in the worksheet calculate the total remediation cost over all acres and provide a means for looking at financing arrangements if any are needed. For the entire 40 acres, the remediation cost will be $6,176 (Line 10). Joe figures he needs to borrow $5,000 toward this amount (Line 11). He can get the money at 9% interest (Line 12), and plans to repay it over seven years (Line 13). This loan would have an annual payment of $993.45 (Line 14). 

Section B in the worksheet shows the annual changes in crop income resulting from remediation.  Joe grows corn on the North 40, and estimates that remediation will restore 25 bushels per acre in yield (Line 15). Pricing this at $2.30 per bushel (Line 16), Joe could expect to receive an extra $57.50 per acre in sales revenue each year (Line 17). Joe’s deficiency payment would not change, regardless of his remediation decision, so Line 18 is zero.

Section C shows the annual changes in input costs due to remediation. If Joe doesn’t remediate, he would need to use an extra 50 pounds per acre of anhydrous ammonia to maintain proper fertility in the now-sandy soil. If he remediates, he will save this input cost; at $0.11 per pound, this amounts to $5.50 per acre each year. 

Section D calculates the present value of the increase in land price due to remediation and then adds up the costs and benefits calculated in the previous sections. Joe estimates that fixing the land will restore an extra $200 per acre to its value (Line 26). He is planning to retire in 10 years and sell the ground to his neighbor, so that is his time horizon for evaluation (Line 27). Because rates of return to land have averaged around 6 percent historically for his area, Joe uses that for his discount rate (Line 28).

Table 1. Cost-Benefit Analysis for Repairing Flood-Damaged Land
Name: Joe Farmer Address: Flooded Out, KS, 66666 Land: North 40
A. Remediation Costs
		Cost per Hour	Hours per acre	Cost per Hour	Cost Share %		Net Farm Cost
1. Deep plowing $255 1.2		$255	1.2	$306	60%		$122
2. Leveling, shaping $50 1		$50	1	$50	60%		$20
3. Remove debris $10 3		$10	3	$30	60%		$12
4. $0 0		$0	0	$0	0%
5. $0 0		$0	0	$0	0%
6. Totals ($/A)				$386			$154
7. Initial value of land ($/A)							$900
8. Maximum remediation cost to obtain cost share ($/A)							$450
9. Number of acres							40
10. Total net farm remediation cost							$6,176
11. Principal for remediation loan							$5,000
12. Interest rate for remediation loan (%)							9.00
13. Length of remediation loan (in years)							7
14. Annual remediation loan payment							$993.45
B. Changes in Annual Crop Income
15. Yield restored by land remediation (units per acre)							25
16. Price per unit ($ per unit)							$2.30
17. Total sales revenue restored by remediation ($/acre)							$57.50
18. Restored deficiency payments due to remediation ($/A)							$0.00
19. Total additional annual income from remediation							$57.50
C. Annual Changes in Input Costs Due to Remediation
(Enter input savings as positive values)
Input Name		Input Unit		Change In Amount		Cost Per Unit		Change In Cost
20. Anhydrous ammonia		pounds		50		$0.11		$5.50
21.				0		0.00		0.00
22.				0		0.00		0.00
23.				0		0.00		0.00
24.				0		0.00		0.00
25. Total savings on input costs due to remediation ($/A)								$5.50
D. Summary Calculations
26. Increase in land price due to remediation ($/A)								$200
27. Time horizon for evaluation (years)								10
28. Present value discount rate (%)								6.00
29. Present value of additional future crop income								$423
30. Present value of future savings on input costs ($/A)								$40
31. Present value of increase in land price ($/A)								$112
32. Total benefits ($/A) (Lines 29 + 30 + 31)								$575
33. Total farm cost after cost share ($/A) (Line 6)								$154
34. Net benefit to remediation ($/A)								$421
35. Net benefit to remediation, all acres								$16,839

Lines 29, 30, and 31 show the present values of the additional future crop income, savings on input costs, and the increase in land value. Receiving an extra $57.50 per year in sales over the next ten years has a present value of $423 per acre, the fertilizer savings of $5.50 per year have a present value of $40 per acre and the extra $200 per acre in land sales price ten years from now has a present value of $112. Line 32 shows the sum of these benefits to be $575 per acre.

From the calculations in Section A, Joe’s share of the remediation cost is only $154 per acre, so remediation seems to be quite advantageous. In fact, in this situation it would appear to be to Joe’s advantage to remediate even if he didn’t get cost-sharing from the government, as the total remediation cost came to $386 per acre.

Data input form for your own cost-benefit analysis

This fact sheet includes a form for the input data needed for the cost-benefit analysis. Complete the form and return it to a representative of the KSU Cooperative Extension Service office if you wish to have an analysis performed for your farm.

Monte L.Vandeveer

KSU Extension Agricultural Economist, Northeast Area

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Cooperative Extension Service Kansas State University Manhattan, Kansas

MF-1153                                                                         January 1994

Issued in furtherance of Cooperative Extension Work, acts of May 8 and June 30, 1914, as amended. Kansas State University, County Extension Councils, and United States Department of Agriculture Cooperating, Richard D. Wootton, Associate Director. All educational programs and materials available without discrimination on the basis of race, color, national origin, sex, age, or disability.

1-94-5M

INPUT DATA FOR FLOOD REMEDIATION COST-BENEFIT ANALYSIS
Kansas Cooperative Extension Service
Name:
Address:
Land:
LAND REMEDIATION COSTS		Cost	Hours	Cost
		per	per	share
Remediation activity		Hour	Acre	%
1.
2.
3.
4.
5.
6. Initial value of land ($/A)
7. Number of acres
8. Principal for remediation loan
9. Interest rate for remediation loan
10. Length of remediation loan (in years)
CHANGES IN ANNUAL CROP INCOME
11.	Yield restored by land remediation (units per acre)
12.	Price per unit ($ per unit)
13.	Restored deficiency payments due to remediation ($/A)
ANNUAL CHANGES IN INPUT COSTS DUE TO REMEDIATION
(Enter input savings as positive values)
			Change	Cost
		Input	in	per
		Unit	amount	unit
14.
15.
16.
17.
18.
CHANGE IN LAND VALUE
19. Increase in land price due to remediation ($/A)
20. Time horizon for evaluation (years)