Longtime Investments in Soil Management

M. L. Upchurch.

A farmer occasionally has to decide whether he should make a longtime investment to improve the soil on his farm. He finds that installing a drainage system, building terraces, and leveling land are costly. He can recover the costs only over a period of years.

Investments in such major improvements therefore require a kind of management decision that is different from the decisions he makes regarding his year-to-year operating practices.

He may make major soil improvements to increase yields, permit changes in his cropping system or use of land, prevent a decline in yields, or reduce his operating expenses.

Whatever the reason, the improvement should bring him a higher future net return from the land: A prudent longtime investment in a soil improvement must return enough to pay for the improvement itself over the years and enough to pay more for the improvement than for any other use that he could have made of the funds.

How does he decide whether to make the investment?

Incomes and costs may be viewed in terms of "flows" over a period of years when considering longtime investments. A farm or a field will require an inflow of funds for operating expenses year after year into the future and will produce an outflow of product.

Both the inflow and the outflow must be put in terms of money, for comparisons between hours of labor or gallons of tractor fuel and bushels of corn or tons of hay cannot be made unless all are expressed in dollars. The difference between the outflow and the inflow is profit, which also may be considered as a flow that will occur repeatedly in the years ahead.

CHANGES in the volume of flow of operating costs, incomes, and profits may be made in many ways. One way is to invest in a soil improvement, the aim of which is to increase the flow of expected profits. That may be accomplished by increasing incomes more than costs, increasing incomes without changing costs, increasing incomes and reducing costs, reducing costs without changing incomes, or reducing costs more than incomes.

Suppose one field needs drainage. Without it, the farmer can expect a flow of costs and incomes about like that shown by lines A and B in the first chart. Now suppose that a drainage system is installed in 1960, and the use of the land is changed from hay and pasture to rotation hay and crops. A new volume of flow for costs, incomes, and profits is established. The difference in the volume of profits expected without the drainage and that expected with the drainage is available to pay for the investment in the drainage system. In this example, both expected costs and incomes would be increased by the investment in the soil improvement.

A field that is eroding badly may produce a declining flow of income, as shown by line B in the second figure. The same crops may be continued, so that expenses will remain substantially unchanged, as in line A. Terraces are built in 1960 to arrest the erosion and maintain productivity. Again a changed volume of flow of income is established. Although the investment does not increase the flow, the flow is not permitted to drop, as it might if no investment were made. The difference in the expected flow of profit with the terraces, compared with the expected flow without them, is available to pay for terracing.

An investment in a soil improvement may raise incomes and at the same time lower operating costs. Such a situation might occur when an underground irrigation system is installed, as is shown in the third diagram. Lines A and B may represent the flow of costs and incomes from a field irrigated from surface ditches. The underground irrigation system may distribute water better and so increase yields and reduce expenses for irrigation, ditch maintenance, and tillage. Annual incomes go up, and annual costs go down. The increased flow of profits is available to pay for the irrigation.

Some investments may reduce the flow of operating costs without necessarily changing the flow of income the redesign of an irrigation system may permit irrigation with less labor.

This situation may be illustrated by lines A and A' in the fourth diagram. Again the added flow of profits is available to pay for the redesign of the irrigation system.

An investment in a land improvement could result in lowering the flow of both operating costs and income when a change in land use is involved. Suppose the longtime use of a field is changed from crops to pasture. Establishment of the pasture sod may be viewed as a longtime investment. Income may be reduced, but operating costs may be reduced still more: For example, hired labor and machine operation might be eliminated. In the fifth figure, line A' represents the changed flow of costs, and line B' represents the changed flow of incomes. The increased flow of profits would be available to pay for the investment.

Physical measurement of the effects of a soil improvement is the first requirement for evaluation. What actually is the result of installing tile drainage, building terraces, putting in underground irrigation, or any other major land improvement?

Conditions vary so widely across the country that I can make no generalization. Conditions vary even from field to field on the same farm to such an extent that estimates of the probable effects of any contemplated practice must be made in each instance.

Estimates must be made also of the probable life, requirements for upkeep, and the trend in productiveness of the soil improvement. The facts in each instance are needed to evaluate the improvement and to arrive at a decision regarding it.

Time distinguishes an investment from an ordinary operating, expense because all individuals discount future incomes whether or not they are conscious of doing so. A dollar is worth more today than the prospect of a dollar next year or 10 years from now.

The extent to which farmers discount future incomes varies between individuals. It depends on the degree of need for income now compared with needs in the future, the degree of uncertainty in the planning period, the expected incomes from funds invested in other enterprises, and other factors. Generally, however, the minimum discount rate on future incomes is the going rate of interest on money.

A farmer who has money to invest in land improvements wants to get from those improvements at least as high a return on his money as he could expect by lending it to someone else. Frequently, of course, farmers would rather invest in their own businesses than lend their money to others to invest. The rate of return that can be gained on loans nevertheless should be used to evaluate alternative investments of comparable risks.