INTRODUCTION

Historically animal agriculture has been a significant social, economic and environmental force for rural America. Animal production creates thousands of jobs and adds value to grain and forages. In some regions animal agriculture is a leading value-adding industry and serves as an important economic engine for a community. Increasingly though there is a growing public awareness of the environmental impacts and nuisances caused by livestock facilities.

The agri-food supply chain values formalization, industrialization, and scale even as the environmental constraints abound. The set of attributes that a multinational retailer (Walmart (US), Carrefour(French), Metro(German), Ahold(Dutch)) requires from its meat supply chain are numerous. Significant in this list of attributes are scale, case ready, shelf-life, uniformity, multiple categories, enhancement, and price to name a few (Goldsmith et al, 2002). To provide these requires large investments in production systems and coordination of the supply chain through packing. Large scale livestock units (CAFOs- confined animal feeding operations), whether they are dairy, feedlot or swine, have become an integral part of modern retails supply chain. While world-wide CAFOs are increasingly relevant to the supply chain and attract capital, they are especially challenged in the US by their community and environmental impact.

A fundamental question exists, can livestock stock systems in the US serve both their communities and their supply chains at the same time. Or are both objectives mutually exclusive? The following report describes research and early findings on this issue of balancing the expectations of the community and the needs of customers.

Background

To date relatively little work has been done on the environmental economics of confined animal feeding operations. For example in Illinois, where the Livestock Facilities Management Act was initiated to help livestock producers find relief, net positive investment flows to livestock have not occurred. The reasons for a lack of investment response are numerous. One significant reason relates to the risk associated with siting a CAFO in the state. These would not be so much the risks that an environmental mishap might occur, but the risk that at a future date the community in part or in its entirety might deem the facility offensive and initiate legal proceedings seeking closure. The LMFA, as well as other tactics, has failed to completely address those risks. While the intent was admirable, to regulate and bring rigor to the siting process, the developers of the Act failed to account for the underlying economics related to discommodity production; mostly, but not limited to odor and water issues.

For example, think of odor as an economic good. In our case it is an economic bad because it has a negative price. People need to be “paid” to consume (smell) it. Flowers produce odors that are an economic good; a fragrance. Livestock odor is only an economic “bad” when it leaves someone's farm and is smelled by a neighbor. The hog farm as a business produces both meat and odor, one is a good and one is a bad. Every firm produces both goods and bads. The reason society allows bads to be produced is that the goods outweigh the bads. In the marketplace one has a positive price and one a negative price. One aspect of bads that is challenging is that sometimes bads become a public issue. A consumer can choose to not consume pork; the same may not be true for odor. Historically, farms were smaller, population was less dense, the rural population was more homogeneous, and livestock production more common. Odor in turn was a much more benign “bad” and generally a private “bad.”

Much has changed in the US in terms of our attitudes towards livestock production systems. Illinois for example, requires since 1991, that new livestock facilities locate at least ¼ mile from a non-farm residence and ½ mile from a populated area. These setback requirements were derived based upon the typical types and sizes of livestock facilities operating in Illinois in late 1980s (IEPA, 1996). The setback provisions were intended to greatly reduce the potential for the occurrence of livestock odor problems.

After the adoption of the current setback requirements, some concerns were raised that the setback provisions were inadequate for large-scale operations. To address this concern, the Illinois Environmental Protection Agency (IEPA) investigated the potential impact of increasing the setback provisions. Using eleven representative townships as examples, they used detailed maps and current setback regulations to exactly specify the extent of potential effected parties from specific swine facilities. The Agency found that between 40% and 60% of the land area in each township would need to be included within a comprehensive setback if all rural residences were assumed to be non-farm residences (IEPA 1996). Meaning that, densities were such that there was really no safe haven, even under current regulations. If in fact there was competition over rural amenities, the current law was inadequate and extending the setbacks was unrealistic.

The Problem

Though industrialized agriculture is a modern phenomenon, the problem it creates is the classic problem in economics of the conflict over property rights. Rural amenities such as clean air and clean water are rural amenities. Historically rural population densities were low so competition for these amenities was limited. With changing demographics, technologies, and infrastructure, rural areas are populated more and more by an urban populace. With greater heterogeneity and density in the population, conflicts over resource use are bound to arise. Now add to the situation the industrialization of animal agriculture. Because of their scale, modern livestock facilities place greater demands on the rural resources such as air and water, intensifying the competition for rural amenities even more.

The challenge for policy makers is how to reconcile the differences over how public bads such as odor, water usage, water pollution, sight pollution, light pollution, and traffic, are distributed between CAFOs and their neighborhoods. The problem is not new because policy makers have dealt with industrial facilities and their environmental and community impact for over thirty years. The context in the case of livestock production is new.

Research Questions

• Is there a harmed party from livestock production?
• If so, should they be compensated for their losses?
• And if so, how much should they be compensated?
• How do the benefits from production compare to the costs from production?
• Knowing the benefits and costs, might there be room to compromise?
• What is the role of government?
• How do you bridge the gap between the legal standards and the community's expectations?

Research Approach

The theme of this research program is that for the livestock industry to grow it needs to attract capital. For net positive flows of capital to occur the business environment both in terms of risk and return need to be improved relative to alternative uses of agro-industrial capital. The siting problem contributes to both; raising the cost of production by not siting efficient units and raising risk by attracting community ill-will and the threat of legal action. The Livestock Management Facilities Act (LMFA), while a positive step, has not corrected the problem enabling positive flows of capital to resume. There still appears to be a gap between what the community expects and what the law specifies.

To begin to understand these issues and answer the above research questions, four integrated research projects have been engaged. The objectives of the four studies are three fold: 1) to understand the concept of industrial legitimacy and how businesses effectively thrive in sync with their communities; 2) to understand if the US/Illinois livestock industry can reverse recent trends and begin to attract capital in light of the siting problem and the opportunities for livestock investment abroad?; 3) If it is possible, what ere the essential elements and what might an appropriate business environment look like? Part of the work looks at how livestock and meat are produced in the country and the dynamics of the global meat complex. Other components assess the benefits and costs of large scale livestock production. The final element focuses on solutions; management and policy changes that might create a more sustainable business model.

Below are four brief overviews of research projects designed to address the objectives. The first is complete. The second is near completion, 1 st quarter 2004. The third project has been underway for six months and will be completed during the summer of 2004, and the final project has just begun and is not due for completion until the second quarter of 2005.

Research Projects (1-4)

1) Understanding the Economic Benefits of Livestock Production
This research analyzed the economic impact of livestock on the State's economy at the county, regional, and state level. Tax, labor, and multiplier values were generated and inter and intra industry comparisons were made. The study resulted in two reports (Goldsmith and Hedris, 2001; Goldsmith and Kim, 2002):

The Economic Impact of Illinois Livestock Industry
http://www.ace.uiuc.edu/faculty/goldsmith/il_livestock.pdf

The Economic Impact of Illinois Livestock Industry: Supply Chain Linkages
http://www.ace.uiuc.edu/faculty/goldsmith/livestock8_02.pdf

2) Understanding the Economic Costs of Livestock Production
While the benefits were now understood from the first studies, the costs were not. For efficient markets to emerge and capital to flow properly, it is very important that the benefits and costs both be well understood. Economist's call this “getting the prices right.” Measuring the negative impact from CAFOs is very difficult to measure. While neighborhood complaints may be valid, they are very difficult to quantify. Harm may be inflated, just has net benefits estimations may be inflated by CAFO operators. Engineers have struggled to measure both the production and the impact of odor on neighboring communities, but have been stymied.

We began a study in 2002 to use the best economic techniques to measure the impact of CAFOs on their communities by analyzing the effects of livestock farms on rural residential housing values. Completion is expected in the 1 st quarter of early 2004. The study comprises the doctoral dissertation of Mr. Jungik Kim and is entitled:

An Assessment of the discommodity effects of swine production on rural property values: A spatial analysis

Executive Summary

The study focuses on Craven County, North Carolina² where there are 26 hog farms ranging from 500 to 13,000 animal units (Figure 1). The essence of the analysis is: does the distance a house is locate from a farm affect its value. Our preliminary estimates show an approximately 5% reduction of the assessed value for 1,000 hogs at ½ mile. The impact declines with distance showing no impact beyond 1.5 miles.

The implications of the study are two-fold. First at the simplest level we have been able to scientifically show that property owners are correct that there can be negative impact to their property values. More importantly, though both property owners and producers can now know the cost. Following the economic logic above, they now can know the prices (negative) of CAFO production. They also can know that if sited properly the benefits of a CAFO can significantly outweigh the costs.

Using our unique methodology we can now assess counties/regions individually. This is important because it is reasonable to believe that the valuation of CAFOs will vary from one community to the next. Having analyzed a particular county the cost can be estimated on a house by house because our unit of analysis is at the house and farm level. This would allow policymakers to differentiate among homeowners. At a practical level that would allow policymakers to provide differential property tax relief to compensate owners for the lower valuations (if existing) from the siting of a CAFO. In such a scenario the county would be able to enjoy the benefits of the CAFO while at the same time compensating harmed parties. Finally, the methodology would allow planners the ability to analyze optimal sites not only within a county but state-wide by factoring in human population density, hog population density (existing and proposed), distances, wind, and current property values. At a practical level planners would then be able to rank sites by their estimated net benefits.

For example, Farm 1 is a medium sized facility with 853 animal units with four houses within a half mile and 16 homes within a one mile radius (Figure 3). Farm 2 is over 3.5 times larger and has twice as many homes within a half mile and a mile. The two farms have significantly different benefit levels in terms of economic impact. They also may have significantly different levels of “cost” in terms of environmental or nuisance impact. By analyzing the specifics of each case and solving for the benefit:cost ratio, a measure of economic sustainability can be derived.

Farms 3 and 4 are located to the southwest of the county seat New Bern. These are larger facilities and are located in very different communities from Farms 1 and 2. While Farm 3 has only three homes within a half mile and 16 within a mile, very close by are a significant number of homes. Many are part of subdivisions, and by Census determination, are located in urban Census tracts. Farm 4, though the smaller of the two, is very close to a significant number of tract homes. According to regional wind records both farms are downwind a most days from their neighbors located to the Northeast.

Each one of the four farms upon complete analysis will have very different benefit:cost ratios. A ranking of preferred locations could be done and decision rules can be set up to compare the various alternatives (see Goldsmith et al, 2003.) As discussed above regional planners and economic development officials can achieve a better understanding of the net impact of large livestock facilities and can act accordingly. Each case has unique features so policy needs to accommodate the differential impact, both positive and negative³.

3) Meeting Community Standards to Improve Siting of Livestock Facilities
This study was begun in 2003 and was designed to document the gap between the legal and community standards. The assessment is done by conducting detailed text analysis of the LMFA hearing transcripts. The underlying theory behind the research is the notion of industrial legitimacy. For an industry to attract capital and grow, it needs to be a legitimate entity in society. That does not mean it produces no harm but that the benefits outweigh the harm (and the level of real harm is below an absolute threshold). In the case of the Illinois livestock industry, the LMFA as a legitimizing policy is not sufficient to achieve net capital flows. For example it is not uncommon for producers to choose not to expand or not to site in order to avoid the LMFA hearing process. Many choose to build on smaller scale simply to be exempt for the LFMA process.

The research asks, given there is a gap between the community and legal standards, what can be done about it. One interesting solution the research is exploring may reside in the economic development literature and policies that lead to sustainable business environments. In such cases zoning, tax policy, infrastructure, and regulation has been used to balance the interests of the industry and the community.

The study is due for completion during the summer of 2004. It comprises the Masters thesis of Mr. Filipe Pereira.

Executive Summary

There have been 24 sitings applications between August 1999 and April 2002 that required a hearing: greater than 1000 animal units or construction of an earthen lagoon (Table 1). The average number of animal units was 2,653 (~8,800 feeder pigs), the minimum was 240 (800) and the maximum was 6,120 (20,400). 21 were for swine units and 3 for dairy. There were no feedlot applications. Of the 24, 13 had hearings scheduled. Four were constructed without a hearing because the county did not request one. Ten facilities were constructed. Five applications were withdrawn. Four of the systems were lagoons, one a pit/SlurryStore and the rest deep pits. Six applications were for expansion and the rest for new locations.

The research has begun analyzing the text of the available hearing transcripts using a text analysis software tool. Thinking of the words of the transcripts as data, we will be able to categorize and analyze; terms, requests, complaints, tone, etc by each of the speakers; community spokes-persons, farmer presentation team members, and government officials. Each person and their location are identified before making each comment. One of the objectives is to strip away rhetoric to identify tangible elements that underlie the various positions represented. For example, one might imagine that participants from outside the region may bring different ideas, tone, and knowledge to the hearing than a more local person. Several of the questions to be answered are: does being in a livestock county hurt or help the process? Is there a relationship between population density, hog density, and the quantity and quality of the public comment? How might a better process differentiate between substantive concern and baseless concern?

4) Manure Management Practices by CAFOs in Illinois: How Effective and the Reasons Why.
The fourth project looks at manure management practices by the largest producers of livestock in the state. One of the best ways for an industry to signal its commitment to being a good steward is for not only best management practices be in place, but the variability across the industry be minimal. This can be accomplished through a commitment to self-monitoring and self-policing. A research team from both the Departments of Agricultural Engineering and Agricultural and Consumer Economics will visit producers in the next year to better understand how manure management is taking place and provide tools, analysis, and resources to those looking to improve. The research also seeks to answer a fundamental question about why if good technology and best management practices are available, there can be such variability in manure management practices?

This project is just underway. The economics' graduate student has yet to be determined.

CONCLUSION

Understanding the adaptation of the livestock industry is difficult. It involves both structural changes in the global meat system, especially as relates to procurement and retailing, and fundamental changes about the use of rural amenities. So for livestock producers both markets and the community standards are changing simultaneously. Often these changes are opposed in expectation.

If the industry is to adapt and grow the answers may lie in better understanding how other industries have adapted in similar situations. Creating a favorable business environment seems critical to both lowering the risk premium associated with livestock capital as well as providing commensurate returns on similar investment found in other locales. It is hoped that this research will provide new insights and practical solutions to challenges facing post-modern livestock production.

REFERENCES

Goldsmith, Peter D. and H. Idris. “The Economic Impact of Illinois's Livestock Industry.” Special Report # 94. http://www.ace.uiuc.edu/faculty/goldsmith/il_livestock.pdf College of Agricultural , Consumer, and Environmental Sciences, The University of Illinois. November, 2001. (Also shown in Reports section H above). 70 pages.

Goldsmith, Peter D. and J. Kim. “The Economic Impact of Illinois's Livestock Industry: Supply Chain Linkages.” Special Report # 95. http://www.ace.uiuc.edu/Faculty/goldsmith/livestock8_02.pdf College of Agricultural , Consumer, and Environmental Sciences. The University of Illinois. July, 2002. 45 pages.

Goldsmith, Peter D. , A. Salvador, D. Knipe, and E. Kendall. “Structural Change or Logical Incrementalism? Turbulence in the Global Meat System.” Journal of Chain and Network Science. Volume 2 Number 2. 2002: 101-115.

Goldsmith, Peter D., C. Pomar, Z. Tao, and J. Rivest. "Social Welfare and the Selection of the Optimum Hog Slaughter Weight." The Canadian Journal of Agricultural Economics. Forthcoming November, 2003

Illinois Environmental Protection Agency. 1996. Summary Report: A study to investigate the potential impact of modifying the new facility setback requirements in the Illinois livestock waste regulations. Office of Environmental Policy. Springfield , Illinois.

Table 1. LMFA Siting Hearing Overview

Figure 1. Craven County, North Carolina. East-central part of the state. Red dots represent hog farms.

Figure 2. North West Craven County. Red parcels represent hog farms. All other parcels represent residential houses.

Figure 3. Farm 1 in Detail

Figure 4. Farm 2 in detail

Figure 5. Farms 3 and 4 near New Bern the county seat of Craven County

¹ Peter Goldsmith is the NSRL Fellow in Agricultural Strategy and an assistant professor of agribusiness management in the Department of Agricultural and Consumer Economics at the University of Illinois.

²Craven County was chosen because it is a mixed use county in the swine growing region of eastern North Carolina. The county maintains excellent real estate and hog operation data that is suitable for spatial analysis.

³This kind of analysis can be done Illinois provided spatial real estate data is available.