THE ECONOMIC IMPACT OF LAND PURCHASES TO MEET BUFFER ZONE REQUIREMENTS ON REPRESENTATIVE TEXAS DAIRIES

AFPC Working Paper 98-6

David P. Anderson
Edward G. Smith
James W. Richardson
Ronald D. Knutson

Agricultural and Food Policy Center
Department of Agricultural Economics
Texas Agricultural Experiment Station
Texas Agricultural Extension Service
Texas A&M University

May 1998

College Station, Texas 77843-2124
Telephone: (409) 845-5913


Background

This briefing paper contains an analysis of the proposed TNRCC rule as printed in the Texas Register, March 6, 1998 on Texas dairy farms. The proposed rule states:

"At the time of initial application, any new facility or expansion of an existing facility designed to confine livestock in numbers equal to or greater than 1000 animal units, or confine poultry at numbers greater than 30,000 with a liquid waste handling system shall not locate any permanent odor sources within 0.50 miles of any occupied residence or business structure, school, church, or public park without written consent and approval from the landowner. For the purposes of this section, any measurement of a buffer distance shall be from the nearest edge of the permanent odor source to the nearest edge of an occupied structure or designated recreational area listed under this subsection."

The 1000 animal unit CAFO definition relates to about 700 dairy cows.

The Agricultural and Food Policy Center maintains a database of 26 representative dairy farms in the major production areas around the country. Four of those dairy farms are located in Texas. There are two dairies, representing moderate and large scale operations in the Erath and Hopkins County areas. The large dairy in each region exceed the number of animal units defined as a CAFO when considering cows, replacement heifers, calves and bulls.

A complex regulation such as the TNRCC proposed rule is not easily analyzed from an economic perspective because of the myriad of assumptions that must be made relative to the spatial and economic characteristics of land markets. This paper includes the assumptions that are made to perform the analysis, a brief discussion of the impacts of purchasing the necessary land, the results, farm characteristics and baseline projections.

Assumptions

The following assumptions are incorporated into this analysis.

Moderate Size Farms

Neither of the moderate size Texas dairies currently qualify as 1000 animal unit or larger CAFOs. The moderate size dairy in the Stephenville area has 400 cows while the farm in Hopkins County has 210 cows. To analyze the impact of additional land purchases on these dairies would require numerous assumptions about cow number expansion and their impact on the economic efficiency of the dairy operation. Neither moderate size dairy could finance the additional land to meet the mile buffer zone with their current structure.

Even without considering the impacts of the proposed regulations under the AFPC Baseline analysis, the Central Texas 400 cow dairy (TXCD400) is projected to be in serious financial condition by year 2002 (AFPC Working Paper 98-1). The Baseline analysis suggests that major changes in the operation must occur for it to remain viable longer term. Increasing size might be one of those changes. In that case, not only would more land have to be purchased to meet the buffer requirements if it reached CAFO limits, but financing for the new facilities and cows would have to be arranged.

The moderate size East Texas dairy (TXED210), while profitable under the Baseline, is a very efficient dairy in the area that has lost more than 30 percent of its producers over the last 3 years. Expectations of continued structural change in the area indicate that this dairy will also have to make operational changes in the future. This East Texas dairy faces the same situation as the TXCD400 dairy in that it could not economically make the land purchase necessary to meet the requirements of the one-half mile buffer zone with its present size. Outside equity capital would have to be infused for this farm to make the transition even if all of the previously mentioned assumptions were met. Therefore, the proposed rules would likely lock these types of dairy operations into a structure that is not sustainable.

Central Texas 825 Cow Dairy

The Central Texas large dairy (TXCD825) currently owns 500 acres of land evenly split between crops and pastures (Appendix B). Therefore, to meet the proposed regulation, the farm must purchase 940 acres of land at a weighted average market value of $675 per acre ($850 for cropland, and $500 for pasture). The additional debt financing to purchase $634,500 of land increases the farm term debt/asset ratio from 17 percent to 48 percent.

The economic and financial impacts of the additional land purchased follows:

East Texas 650 Cow Dairy

The large scale East Texas dairy (TXCD650) owned 800 acres of land, thus it must purchase 640 acres to meet the 1440 acre requirement.

Summary

While the assumptions that were made relative to land availability, its characteristics and its market value were rather overly simplistic, they point out the complexity of analyzing the implementation of such a proposed rule, especially for expanding dairy facilities. In this respect, the adverse consequences described are conservative. In reality, land is not always readily available for purchase. Even if it were the knowledge that the dairy must have it to expand would likely result in increases in the market power of the landowner and thus the price. Moderate dairies currently under structural pressure to grow could be constrained from growing to an economical size. This constraint could result in lower market values for existing dairies of all sizes.