Cost-Benefit Analyses: Exploring the Economics of On-Farm Composting

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Courtesy of BioCycle Magazine

When exploring the merits of on-farm composting, the question most often raised is: What are the economics? How do the savings or revenues from on-farm composting compare to the costs? Of course, the answer is the ever present “it depends.” Expenses, resources, revenue opportunities, environmental constraints and circumstances vary greatly from one farm to the next. Most people would agree that composting brings numerous benefits to farms but they are less sure whether the economic value of those benefits outweigh the costs of producing and/or using compost.

For on-farm composting, the economics are more complicated than revenue versus cost of production because other factors on the farm enter the equation. For example, revenue that a dairy farm receives from the sale of compost may not cover the costs of production, yet composting might still pay for itself because it lowers the overall costs of manure handling and distribution. In other cases, there may be no revenue involved but composting is simply the least costly, or most easily implemented, alternative. Composting of poultry and animal mortalities is a good example.

The economic benefits of using compost on farms may be the most difficult scenario to assess. The cost of compost, either purchased or produced, must be justified in terms of greater crop returns or fewer inputs. Some of these benefits are not easily isolated or valued, and may take years to appear.

The cost-benefit formula depends a lot on the circumstances of the farm. Farms are increasingly constrained by nutrient management, watershed protection, encroaching city-folk and other environmental pressures. They also are being encouraged to rebuild soil quality, use fewer pesticides, conserve water, and generally farm more sustainably. Furthermore, many sectors of agriculture have been suffering several years of low prices. This directly influences the farm’s ability to purchase compost or becomes an impetus to start composting as a revenue source.

While all farms are facing more constraints, some feel the impacts sooner or greater. Composting may particularly appeal to farms in this situation — where “business as usual” has either become too expensive or unacceptable. For example, if cropland neighboring a feedlot already is saturated with phosphorus, the economic question is not about the cost-benefit of composting versus raw manure application. Manure application simply isn’t an option. Instead, the question is what is the cost-benefit of composting versus other nontraditional options such as drying manure, trucking it away or letting someone else compost it on the farm.

The purpose of this article is to provide insight into the economics of on-farm composting via case studies from the real world of farm composters. Seven on-farm composters generously shared information about their motivations for composting, the expenses they face and the revenues and/or savings they gain. The article does not, and is not intended to, provide an evaluation of the profitability of the case study farms. However, the information presented should help a curious reader with a sharp pencil determine what the economic picture for an on-farm composting operation might be.

To coincide with the upcoming BioCycle West Coast Conference in Portland, Oregon, all of the case study farms are located within or near the Pacific Northwest of North America. The article will be presented in two parts. Part I profiles case studies from the western section of the region. Case studies from the eastern or inland Northwest are described in Part II, which will appear in the next issue of BioCycle (March, 2001).

ECONOMIC ELEMENTS

Whatever their motivations, farmers expect composting to pay off by either bringing in revenue or lowering farm expenses in excess of the composting costs. Perhaps the most apparent potential source of revenue is the sale of compost produced from farm residues, with or without other feedstocks added. Although manure also can be sold, it sells for a lower price and with less demand than compost. Compost broadens the pool of potential buyers because, economically, it can be transported further than manure (less weight/volume, higher value). In addition, revenue may be generated from composting services. A farm composter can get paid to accept residuals from off the farm such as municipal yard trimmings or food processing by-products. In these cases, regulations may constrain what and how much off-farm material can be accepted, or restrict compost use to the farm. Equipment and labor employed in the composting operation can earn revenue in other ways. For example, a farm might contract to compost materials for other farms. Another possibility is that grinders, screens, trucks or other equipment can be hired out when not in use on the farm.

There are numerous ways that composting can result in savings to the farm. In addition to less costly manure handling (if land application sites are unavailable) and mortality management, other examples include: Elimination or reduction of handling and disposal costs for crop residues (e.g. grass seed straw, seed screenings, mint slugs, produce culls); benefits from fewer weed seeds in compost rather than manure; and reduced pesticides and other costs for fly control. In addition, there are a host of intangible benefits that are difficult to put a value on, including improved neighbor relations due to fewer odors and flies, improved animal health resulting in lower veterinary costs and/or better productivity, and a smaller risk of dispersing pathogens and lower environmental impacts (runoff, leaching).

Last, but not least, are the benefits from using compost in cropping operations. These include greater crop yields; reduced fungicide use for disease control; reduced pesticide use due to better crop vigor; reduced water consumption due to better soil conditions; better or more consistent crop quality; and improved production under harsh conditions (e.g. drought). Although it can be difficult, some of these benefits can be measured in economic terms (e.g., increased yield and decreased water and pesticide usage).

The cost (expense) elements can be grouped into six general categories: business and site development, feedstocks, equipment, labor, marketing and/or compost use, and management. Examples of elements within each category are below:

Business and Site Development: Planning, engineering and other consulting expenses; permits and licenses; financing interest; land cost/value; site preparation; aggregate and fill; paving; fencing; road construction or improvement.

Cost Of Feedstocks: Purchase, transportation, handling and/or processing (e.g. sorting, grinding) of bulking agents, dry amendments, nitrogen sources; cost of components for blended products (e.g. topsoil, sand).

Equipment: Ownership costs (principal and interest) and operating costs (fuel, maintenance, replacement parts). Equipment costs are often expressed at an hourly rate that includes ownership, fuel, maintenance and labor.

Labor: Labor costs can be divided into operations and maintenance. Examples related to operations include materials collection and handling; receiving; sorting; grinding/shredding; mixing; windrow/pile formation; turning; watering; screening; trucking; process monitoring and record keeping. Examples related to maintenance include equipment, vehicle, site and building maintenance; dust control; site monitoring; and biofilter maintenance.

Cost Of Compost Marketing And/Or Use: Blending; bagging; transportation; marketing and promotion; and land application.

Management And Support: Administrative/office expenses; management staff; security; engineering and environmental consulting; legal fees; research and development; security; insurance; and permits, fees and licenses.

ON-FARM COMPOSTING CASE STUDIES

The following descriptions of the on-farm composting operations were compiled from telephone interviews with managers of the farm and/or the composting enterprise. In each case, the manager is also an owner of the business. The cost and revenue estimates included in the following descriptions are just that –- estimates. While some figures come from records of expenditures and sales, others are off-the-top-of-the-head recollections of the person interviewed. It was not uncommon for a manager to answer with a phrase such as “Let’s see, we bought that around 1994 and I think we paid something like $5,000 for it used.” Some estimates are complicated by the fact that composting expenses and revenues overlap with other farm activities. In all cases, however, the managers are confident that the estimates given are reasonably accurate.

The case study operations that follow represent a broad cross section of farm composting enterprises, with varying feedstocks and scales of operation. They are in the composting game for different reasons and therefore have a different set of costs and revenue/savings streams. One feature that they share is proximity. All of the following case study farms are located within or near the Pacific Northwest (which unofficially encompasses Idaho, Washington, Oregon and British Columbia).

Although most of the information presented is relevant to on-farm composting anywhere, conditions in the Pacific Northwest region certainly influence these operations. The region is diverse in climate, geography and economy but it can be generally divided into two sections -– Eastern or Inland, and Western or Coastal.

The Inland section, east of the Cascade Mountains, is a large area characterized by a dry to very dry climate with cold to very cold winters. The precipitation and temperature can change drastically with changes in elevation. Much of the agriculture is located in river valleys and depends heavily on irrigation. Agriculture is a dominant part of commerce. Farms tend to be large in size and serve a large food processing industry. In some localities, agriculture may be the primary market for compost. There are only a few widely dispersed urban centers.

In contrast, the Coastal area, west of the mountains, has a wet climate with moderate temperatures. Rain is frequent from late fall through spring but the remaining part of the year is relatively dry. Large metropolitan areas exist (e.g. Portland, Seattle, and Vancouver, British Columbia) along with numerous smaller cities and the associated suburbs. While agriculture is important to the economy, other industries are more prominent, such as forestry and manufacturing. Compared to their inland counterparts, most farms are small in size. However, the coastal section does contain large farms, especially in productive agricultural areas like the Willamette Valley of Oregon.

BAILEY DAIRY/BAILEY COMPOST

The uncertain, often meager, profitability of dairy and crop farming led the Bailey Farm to composting. The farm needed another revenue stream plus a better way to manage manure in the increasingly suburban surroundings of western Washington. It considered composting synergistic with its dairy and cropping operations. While suburbanization makes farming difficult, it also brings opportunities. In Bailey’s case, the primary opportunity was the availability of municipal yard trimmings for which it could charge a tipping fee. The growing population also provides potential buyers for compost.

With the help of a consultant, Price-Moon Enterprises, Bailey Farm obtained contracts and permits to accept yard trimmings and set up an extended aerated static pile composting system on the farm. At the same time that the composting facilities were constructed, the farm also installed a new manure storage lagoon adjacent to the composting area. Yard trimmings are delivered to the site six days/week. The site is only a short distance from the road and accessible via an existing farm drive. It was not necessary to develop new roads, though road maintenance is greater. Bailey Compost combines the yard trimmings with approximately one quarter of the manure generated by the 180-cow dairy farm (the drier “stuff”) plus some bedded horse manure from nearby stables. The remaining manure is stored in the lagoon and eventually applied to the cropland by direct soil injection.

The composting area is not covered. The six-inch reinforced concrete composting and staging pad is 150 feet by 400 feet. It was expanded once since the operation’s inception. The pad drains to a sump, from which leachate is pumped into the manure lagoon. Although the lagoon also can serve as a source of water for the composting process, the need for additional water has been very rare. The farm estimates that the cost to develop the composting site and system totaled approximately $400,000, including the expansion. Because it is not strictly an agricultural composting operation, the farm pays an annual permit fee, which has ranged from $3,000 to $4,000.

The extended aerated static pile system employs four portable five-horsepower blowers with three-phase electrical motors. The farm had to have three-phase power service brought in along existing utility poles. Air is fed from the blowers to the pile via perforated plastic pipe that sits on the surface of the pad. Controls and electrical utilities for the aeration system are housed in a small wooden shed. The farm invested approximately $10,000 in the aeration system, including blowers, controls and service.

While the aerated pile method eliminates the need for a turner, processing yard trimmings requires additional equipment for grinding and screening. In addition to wheel loaders and spreaders, the operation includes a tub grinder and trommel screen (Table 1). Previously, a screen had been rented periodically but the farm found it less expensive to purchase one. The screen now operates approximately 700 hours/year. Use of the grinder is seasonal, depending on the delivery of yard trimmings. For eight months of the year, the grinder works an average of 25 hours/week. During the four month off-season, an average of five hours/week is typical. Maintenance of the grinder is expensive. On average, Bailey’s replaces 80 hammer tips/month at a cost of $1,000, not including labor and other parts. The operation uses the equivalent of one-and-half full time employees to handle materials, process yard trimmings, build piles, screen compost, maintain the site and equipment and manage the composting process. Labor demands vary over the year. In general, one person works on the composting operation year round and other farm employees help out during busy periods and for specific tasks. The farm estimates that the production cost for unscreened compost is slightly greater than $4/cy, accounting for capital expenses but not land.

The primary revenue source for Bailey’s Compost is tipping fees from yard trimmings. The farm receives approximately 30,000 cy/year of yard trimmings and charges $12/cy. Compost sales add an additional $50,000/year. The composting permit requires that the farm must use at least half of the compost produced, more specifically half of what is generated from materials brought on to the farm. Fortunately, the farm has 450 acres for pasture, raising corn silage and haylage for cattle feed, and growing vegetables for its U-pick and roadside stand businesses. Due largely to its use of compost, the farm’s fertilizer bill has been reduced by $25,000/per year. Since most of the manure remains on the farm, this savings primarily results from the nutrients imported with the yard trimmings.

WILLAMETTE CROP AND COMPOST

This farm, located in the Willamette Valley of western Oregon, produces sweet corn, field corn and squash (for seed) on approximately 250 acres (Willamette Crop and Compost is a pseudonym as the farm did not want to be identified). The farm also composts manure from a dairy operation. The 350-cow dairy shares part of the farmstead, but is a separate entity. The dairy farm rents the barns and land that it occupies from the crop farm. The rental contract stipulates that the crop farm is responsible for managing the manure produced by the dairy. In a sense, composting allows the crop farm to have its lease with the dairy.

Composting was adopted about ten years ago because there is not enough cropland to spread the manure without overloading it with nutrients, and because the grower is concerned about introducing weeds with the manure. Most of the compost is sold in bulk, with the remainder used by the farm. At a minimum, revenue from the sale of compost is intended to offset the cost of composting. In this case study, composting is a small, sideline enterprise. The land, labor and other costs dedicated to composting are not clearly delineated from other farm activities.

Willamette Crop and Compost has an agricultural composting permit that required some expense related to the initial paperwork but no annual fee. The composting operation occupies three areas on the farmstead — a 100 foot by 200 foot paved pad for winter composting, a 50 foot wide by 200 foot long composting building, and a composting yard on compacted soil for summer operation. The paved area used for winter composting existed before the composting operation. Windrows are established on the paved pad and turned for about three weeks, after which the material is placed in the composting building. Moving the process indoors results in dryer compost in the moist environment of western Oregon. The composting system inside the building consists of a 30-foot wide bed with a turner that agitates and moves the material through the bed.

The farm estimates that it has about $45,000 invested in the composting building, including $20,000 for construction materials and $15,000 for the bed turner (the remainder covering farm labor and electrical service). Both the building and turner were constructed with farm labor. The summer composting yard is used only during the dry season to provide more space for composting and flexibility in managing materials. Five years ago, the farm established a vermicomposting operation to further process and add value to the partially composted manure. The vermicomposting windrows are located outdoors near the summer composting yard in three different areas, covering a total of about three acres.

In addition to the system in the building, the composting operation uses a mobile self-propelled straddle-style turner (14 feet wide), a wheel loader, a side discharge manure spreader and a dump truck (Table 2). The loader, spreader and truck also are used for farming. Labor for composting is provided by three employees who split their time between composting and farming. The estimated labor costs for composting alone are approximately $30,000 or the equivalent of one full-time worker. The farm manager spends only a small portion of his time managing the composting operation, and very little time marketing compost. The farm also performs custom turning services to help pay for equipment costs. Revenue from custom composting ranges from $6,000 to $8,000/year.

The composting feedstocks include a large volume of grass seed straw as a dry amendment to the bedded dairy manure. The straw is obtained at no cost from an export company. Occasionally, other agricultural residuals from local businesses are accepted, including seed screenings and egg shells, for a fee of approximately $20/ton. The quantity of these residuals is minimal relative to the dairy manure and straw. Last year, approximately 20,000 cy of raw manure and straw were composted, producing roughly 5,000 cy of compost products. The huge shrinkage in the materials (75 percent) is largely due to the straw.

The farm sells three bulk compost products: vermicompost at $35/cy; compost at $20 to $25/cy; and uncured compost at $8 to $10/cy. These prices do not include delivery, which is available at an additional charge. Last year’s production amounted to approximately 2,000 cy of vermicompost; 2,000 cy of compost; and less than 1,000 cy of uncured compost. According to the farm manager, all of the vermicompost and uncured compost, and about half of the standard compost, were sold. The remainder was applied to cropland. The farm manger believes that money has been saved by applying compost rather than raw manure to fields, and that the better weed control has reduced herbicide use. However, he is unable to place a dollar value on these benefits. Currently, little time or money is invested in marketing compost. Sales are strictly by word-of-mouth. The farm manager expects sales of compost would increase with a larger marketing effort, but also finds it challenging to compete with low-priced compost made from minimally processed manure and composts made from materials that earn revenues largely through tipping fees.

DOWN-TO-EARTH ECO FARM

Down-to-Earth Eco Farm in British Columbia started in 1989 as a pilot project to develop an alternative humane housing system for raising hogs (the “Eco Barn”). Approximately 3,000 pigs/year are raised in bedded pens on sawdust and wood shavings. As the pigs move about, they work the manure/bedding mixture down the sloped pens into a gutter, where it is collected by a mechanical scraper. In part, this system was developed to avoid problems associated with handling liquid hog manure.

The farm began composting in 1993 to further aid in manure management. However, from the start, composting was considered a revenue generating venture. An agitated bed composting system was designed and gradually refined for use on the farm and eventually to sell to other composters. Down-to Earth also made compost market development a priority, targeting high value uses such as planting media for greenhouses. Compost production is based on the premise that a high quality, consistent, and odorless product is necessary to make a profit selling compost.

The composting system is covered by a 60 foot by 250 foot steel building. Approximately $165,000 (U.S.) has been invested in the materials and construction of the building and composting system, including the cost of concrete, blowers and other devices. The bed turner and aeration system added another $42,000 and $8,000, respectively, in capital expense.

Other than the turner and blowers, very little equipment is involved in the composting operation (Table 3). The gutter scraper deposits manure from the barn to a small storage shed. A skid-steer loader then moves the manure to the composting bed. The same skid loader is used to transfer compost from the bed to a curing area within the same building. Staff from the hog farm are responsible for materials handling and spend approximately two hours/day on composting tasks.

Down-to-earth calculates the total cost of compost production to be about $10/cy with capital expenses amortized over ten years. Most of this cost, 80 percent, is due to capital investment. The remaining 20 percent is from labor, electricity and other miscellaneous expenses.

In addition to the compost production facilities, the farm has invested $200,000 in research and development (R&D). The R&D program is part of a concerted effort by Down-to-earth to create a market niche among users willing and able to pay a higher price for compost. About three-quarters of the R&D dollars have been dedicated to market development. The farm has funded research, conducted by scientific consultants, to determine and demonstrate the value of the compost. Much of the R&D has taken place in greenhouses using composting as a component of growing bed soil and potting media. According to Down-to-earth, its research has shown that the compost consistently and reliably suppresses specific diseases in greenhouse crops. The farm also helps growers (i.e. potential buyers) establish applied research studies in their own greenhouses. While the greenhouse industry is a key part of its niche, other compost users also are being targeted including other ornamental horticulture producers and the turf industry. Additional R&D expenses are being designated for developing and marketing products suited to these industries, such as pelletized products.

Down to Earth currently sells compost to greenhouses and other horticultural users for $16/cy for bulk unscreened compost and $24/cy for screened compost. There is a charge of $20 to deliver a 6-cy load of compost to local customers. Down to Earth also has a bagged product, priced at $4.80 for a 40-liter bag. Information regarding current production and sales volume are not available. Most of the revenue currently earned is reinvested in the company to establish markets and refine products (e.g. pelletization). The present production level of about 1,800 cy/year is expected to increase as more high-end markets are developed. The farm plans to eventually play the role of compost broker, selling high-value compost produced by other farms that use the composting system developed by Down-to Earth Eco Farm.

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