Zuppan Dairy Economic Analysis
Economic Case Study of CDFA Funded Manure Solid Separator
2018 Grant Cycle
Prepared by Jesse Voremberg
Liquid manure from animal feeding operations on dairies releases methane if left stagnant. Methane is a powerful heat trapping gas, which has a global warming potential about 28-36 times greater than carbon dioxide over a 100-year period (EPA, 2020).
California Department of Food and Agriculture (CDFA) funds and manages the Alternative Manure Management Program (AMMP) to incentivize Climate Smart Agriculture practices. They have partnered with University of California Cooperative Extension to deploy Community Education Specialists to help farmers and ranchers apply for funding and implement practices. These practices are aimed at reducing greenhouse gas emissions and protecting water and air quality. Livestock and dairy operations in California are eligible to apply for grants up to $750,000 to use pasture-based management, conversion from flush to scrape manure management, alternative manure treatment and storage methods, and solid separation.
Milking about 600 cows in Glenn County, Zuppan Dairy was disposing of manure by scraping it into a lagoon and eventually removing it from the dairy for application of the nutrients to crop land. CDFA awarded them a $368,273 AMMP grant (including $25,000 in matching funds) in 2018 to install a manure solid separator and related equipment. In addition to reducing methane emissions, the project may also decrease water and air pollution by lowering buildup of manure solids in storage ponds and reducing commercial fertilizer use.
Annual private benefit from the separator is estimated to be between about $29,500 to $37,000. The Zuppans estimate yearly savings of about $6,000-$7,000 a year from reduced manure excavation, about 1,144 gallons of diesel (about $3,800 savings value), $13,000-$15,000 on commercial fertilizer, and $10,000-$15,000 on cleaning and maintenance of existing lagoons. There are additional costs, namely 8,000 kWh in added electricity use (about $1,000 cost) and $850-$2,200 in annual maintenance of the separator. There were also two one-time costs: about 40 hours of labor hours spent learning to operate the separator and a $25,000 in-kind cost share for the grant.
Figure 1: Recurring yearly savings. There are two columns of potential benefits, which should narrow down over time as Zuppan Dairy has more years of data. At the moment, the most variability on net benefit is from savings on pond cleaning and costs associated with maintenance of the separator.
This AMMP grant has the potential to save Zuppan Dairy hundreds of thousands of dollars over the lifetime of the separator. The discounted present value of the private benefit, or the value at inception, of the project to the farmer varies greatly depending on the estimated lifetime of the separator and the discount rate selected. This analysis used two time horizons (30 and 40 years) and discount rates (3% and 7%) and applied those to both the low mark and high mark of the yearly estimate. Finally, a midpoint value was calculated using a 35-year time horizon, a 5% discount rate and the midpoint of the yearly estimate ($33,300).
At the high end of the potential private benefit, using a 40-year time horizon and 3% discounting rate, the Zuppans would incur a benefit of $863,000. At the low end of the potential private benefit, using a 30-year time horizon and 7% discounting rate, the Zuppans would incur a benefit of $368,000. Coincidentally, this number coincides with the total cost of the project. This shows that even without the $343,000 awarded grant, this project could be economically viable with a low-interest loan. This range is wide, so using midpoints of each variable, the present value of the net private benefit of this project is about $550,000.
Figure 2: The discounted present value indicates the value of the project to the farmer at the year (2018) of applying for the grant. This considers both the lifespan of the project and the value of money spent now versus money gained in the future. A lower discount rate indicates a more equal value attached to money now and in the future, while a higher discount rate indicates a preference for money now versus money in the future. This impacts the overall value of the project significantly.
There is a substantial public benefit to this project as well due to the methane reductions. The separator will reduce the dairy’s emissions by an estimated 4,059 metric tons of carbon dioxide equivalent over five years. Using a social cost of carbon of $51/ton, which is the Biden administration’s likely figure for their cost-benefit analyses, this project could create benefit of about $41,400 per year from methane reductions. That is the equivalent to removing 176 cars from the road annually. Extrapolated over a potential 35-year lifetime of the project that works out to 6,160 cars removed and a public benefit of more than $1.4 million.
Figure 3: Substantial public benefit accrues from the reduced environmental impact from lowered methane emissions.
There are some limitations to this analysis. First, the initial figures are estimates from the farmer and have not been verified. Second, the lifespan of the separator is unknown, although the farmer estimated it will last for at least 30 years. Finally, the range of the discounted present value of net benefits is wide, due to the difficulty in selecting a discount rate. On one hand, a discount rate more in line with public projects (3%) is logical since the project is funded by a CDFA grant. On the other hand, the intention here is to calculate the private benefit to the farmer, whereby a discount rate more in line with market returns (7%) is more logical. A more appropriate estimate of the discount rate might be the loan rate a bank would offer to purchase the equipment.
Even selecting the higher discount rate and shorter time horizon, the private net benefit is equal to the amount of the grant. This indicates that even without a CDFA grant and with a low-interest (less than 7%) loan, a project like this could make economic sense for a farmer. The social benefit is notable, whereby the benefits from reducing methane emissions alone far exceeds the grant amount. The next page includes a full explanation and accounting of the economic analysis.