Economic Evaluation of Alternative Manure Management Systems for Pork Production

Producers, researchers, vendors, regulators, and policy-makers are evaluating alternative manure management systems. Motivations include reduction of the level and risk of emissions of potential pollutants to the environment (nutrients, odor, particulates and precursors, gases, and pathogens) as well as the capture of potentially valuable constituents of manure (nutrients, energy, and water). Understanding the economic implications of alternative manure management systems is required in addition to understanding physical performance and on-farm practicality of the systems. This fact sheet reports methods, findings, and examples of economic evaluation of alternative manure management systems based on work completed under the agreements between the Attorney General of North Carolina and Smithfield Foods, Premium Standard Farms, and Front Line Farmers. Even though this study was conducted with these pork operations, the basic approach or process for evaluating alternative manure management systems throughout the US may be similar.

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Objectives

The objectives of this fact sheet are:

• Identify criteria for manure management system selection and design.

• Provide a brief background on the economic analysis conducted under the agreements between the North Carolina Attorney General and Smithfield Foods, Premium Standard Farms, and Front Line Farmers.

• Describe methods and issues in projecting farm costs and returns of a manure management system. Summarize some of the results of the North Carolina study. Identify limitations for on-farm decision making and for policy development.

Background

Criteria for manure management system selection and design must be specified before economic analysis proceeds. Profit maximization subject to resource and technology constraints is a common objective for operations. However, for processes where costs exceed revenues, as is often the case for manure management, constrained cost minimization becomes the objective. Important constraints in manure management include the maximum acceptable level and risk of emissions of various potential pollutants. Available technology and acceptability of technology to regulatory agencies are important constraints. The average and maximum flow (volume per unit time) of manure to be managed as well as its composition (percentages of solids, volatile solids, nitrogen, and phosphorus) are important design criteria. Other important criteria include the area of land available to receive manure, the distance to that land, and the quantity of nutrients and water that the land can receive.

A manure management system consists of all the components and processes necessary to manage the manure at a specific farm. Once the system has been designed and specified to fit the conditions at a farm, then predicted costs and returns of the system can be calculated. The predicted costs and returns are conditional on the equipment, the operating procedures, and the manure flow and composition specified.

Economic analysis conducted under the agreements between the North Carolina Attorney General and Smithfield Foods, Premium Standard Farms, and Front Line Farmers is the basis for this fact sheet (Zering, et al., 2005a; Zering, et al, 2005b; Zerring, et al., 2006; Williams, 2005; Williams, 2006). The costs and returns analysis is one part of a larger economic feasibility analysis undertaken as part of the agreements. The practical problem addressed by the North Carolina costs and returns analysis was as follows: using performance and cost data generated from single prototype installations of each selected technology operated for a limited period of time, predict the cost and returns of retrofitting unspecified subsets of North Carolina pig operations with each technology. Insights can be drawn for any producer considering manure management systems.

Methods of Projecting Costs and Returns

A partial budgeting approach is used to predict changes or differences in costs and returns that would result from an operation adopting a manure management system. Changed cost and returns includes the annualized (amortized) value of change in investment, change in annual operating cost, and change in annual returns or income. Complete manure management systems are modeled in order to better predict operation level adoption cost and returns and to allow better comparisons of cost and performance across technologies/systems. A very important and labor intensive part of the modeling process is adapting performance and cost and returns approximations from disparate data sources to the operation being analyzed. Categories of differences between operations include the type of pigs housed at the operation (breeding stock, nursery pigs, grow-finish pigs, or some combination), number of pigs being served by the system, type of manure removal from the barns (slurry, flush or pit recharge), flushing or pit recharging schedule, the volume and composition of manure and wastewater being produced, topography and soil type, and acres, yield, and type of crops receiving manure. Standardization (adaptation) of cost and return approximations is critical to allowing consistent comparisons of different systems. Technology design equations, scale dependent cost and return calculations, and expected manure and wastewater volume and concentration are required for adaptation.

Cost and return estimates can be reported with a variety of denominators such as $ per farm per year, $ per head capacity, $ per 1,000 gallons manure generated, and $ per head marketed. The North Carolina study reported cost and returns with a denominator of 1,000 pounds SSLW (steady state live weight) which is a measure of capacity or inventory. This unit is adopted as the most consistent method of comparing costs and returns across operations with different ages and types of pigs. Standard steady state live weights per head in inventory are specified by Natural Resources Conservation Service (NRCS) and other agencies. The following standard SSLW per head were used in the North Carolina study: 135 pounds per feeder to finish pig, 30 pounds per nursery (wean to feeder) pig, 433 per sow in a farrow to wean operation, 522 pounds per sow in a farrow to feeder operation, and 1,417 pounds per sow in a farrow to finish operation.

Data

A large body of data from primary and secondary sources was collected for the North Carolina analysis. A strong effort was made to collect cost and return data and performance data from the experimental sites that corresponded to operating conditions when emission measurements were made by a team of scientists. Types of data collected include: cost and revenue data, and process data from each of the technologies; secondary information on costs of scaling technologies from the demonstration farm to a set of representative farms; prices and performance characteristics of components; assistance in understanding system design and operation, and in modifying design to fit representative farms. Data sources include primary data collection at the experimental sites, technology providers, an engineering firm (Cavanaugh and Associates), equipment suppliers, a regulatory agency (North Carolina Dept. of Environment and Natural Resources), pork production companies, and farm owners and operators. Pork producers should seek the assistance of independent engineering professionals in assembling data, designing and evaluating manure management systems for their operation.

Analytical Steps

The partial budgeting steps taken in the North Carolina study can be adapted to most operations.

1. First, actual invoiced amounts were used to estimate the cost of retrofitting the experimental farms with the technology. In general, obtain the actual installation costs, manure volume and concentration, and operating costs and returns data from other farms for the system being analyzed.

2. Invoiced costs were adjusted to remove unnecessary expenses, costs of items that were subsequently proven unnecessary, and add estimated cost of missing components required to make a complete system. In general, subtract the costs and returns that will not apply to your operation and add those that are missing.

3. Design equations and secondary information on equipment prices, standardized manure flows and composition, and the observed performance of the technologies were used to predict costs and returns on a standardized operation (Tables 1 and 2) (http://www.cals.ncsu.edu/waste_mgt/ smithfield_projects). This adaptation of flows and prices allows an “apples to apples” comparison. In general, measure the average and maximum flow rates of manure volume and concentration on your operation and have an engineer develop a preliminary design of a complete system that would achieve the same level of treatment on your operation.

4. Calculate total initial investment to install the system on your operation including purchase of equipment and materials, construction and installation, and overhead. Overhead includes design and contractor profit as well as bonds and contingency charges. Include the value of owner supplied inputs such as labor, management, land, capital, risk-bearing, and machinery time and fuel. For large expense items, use supplier and contractor bids to determine the current costs for your operation.

5. Convert the total initial investment to annual costs. The North Carolina study used amortization (equal annual payments) over the expected economic life of the equipment and construction charges to calculate an annual cost to the operation. A maximum economic life of 10 years was assumed along with an annual interest rate of 8%. Economic life is defined here as the minimum of: the technical useful life of the device (e.g. lagoon, pump), the period for which the pig operation remains in production, the period until the device is rendered obsolete (by changes in regulations or technology or prices or other factors), or any other period that ends with the technology no longer being used to produce pigs.

6. Calculate annual operating costs using quantities predicted by the design for your operation and your prices. For example, the North Carolina study used $0.08 per KwH of electricity. Include changes in land application practices, costs and returns.

7. Calculate the annual revenue from sales of products of the manure management system. Examples of products include separated manure solids, compost, biogas, electricity, ash, separated phosphorus, fertilizer, and methanol. Use the price that you are assured of receiving at your operation for the quantity of product that you predict will be produced.

8. Calculate the annual value of avoided costs on the operation due to the manure management system. Examples are the value of purchased fertilizer and fertilizer applications that are avoided by land applying manure and the reduction in electricity purchases due to on-farm energy generation. A rule adopted in the North Carolina study for valuing products of the manure management system was as follows. All products were valued at the first point where legitimate markets existed. In cases where the technology produces a product for which a market was not yet developed, then markets for close substitutes were used for valuation at the first point where close substitutes existed.

Examples of Results

Predicted net costs of retrofitting pork operations with selected technologies in the North Carolina study are reported in Tables 1 and 2. New operations installing systems might have entirely different costs. Predicted effects on nitrogen and phosphorus flows are reported in Table 3.

Several outcomes of the analysis are notable. The net additional cost of retrofitting a farm with these systems varies considerably from one technology to the next ( Table 1.) with additional net costs ranging from $89 to $399 per 1000 pounds SSLW per year over a 10 year period. Predicted annual operating costs (electricity, labor, repairs and maintenance, supplies) range across technologies from $6 to $145 per 1000 pounds SSLW per year. A wide range in costs across various farm sizes and types is noted in Table 1. In most cases, the high cost estimates are for the smallest farms simulated while the lowest costs per unit are incurred by the largest farms.

Table 1: Comparison of predicted incremental costs and returns of retrofit for candidate technologies on a standardized 4,320-head feeder-to-finish farm with pit-recharge system and nitrogen-based land application onto forages

* Barham Farm costs do not include biogas-fueled electricity generator or greenhouse or greenhouse biofilter..

** Belt system costs assume retrofit of the technology to a 1,224-head finishing barn. Total costs have been scaled by a factor of 3.53.

*** Steady state live weight (SSLW) per head: 135 pounds per feeder to finish pig, 30 pounds per nursery (wean to feeder) pig, 433 per sow in a farrow to wean operation, 522 pounds per sow in a farrow to feeder operation, and 1,417 pounds per sow in a farrow to finish operation.

Table 2 provides a breakdown of all costs by component for the technologies. Note the wide range in costs of solids separation. Effectiveness of separation also varied widely with the least costly being the least effective. Note that aeration devices add greatly to the cost of the systems due to both equipment costs and electricity use.

Table 2: Breakdown by component of candidate technology predicted additional costs* of retrofit on a standardized 4,320-head feeder-to-finish farm with pit-recharge system and nitrogen-based land application onto forages

* All costs in $ / 1,000 lbs. SSLW / Year

Nutrient separation, loss, and removal vary by technology (Table 3). Technologies with effective solids separation (belt system and super soils system) are noticeable in the quantity of nutrients (N and P) land applied in solids. Technologies with aeration remove some nitrogen through conversion to nitrate and then (it is assumed) to di-nitrogen gas. In several cases, our data was insufficient to conclude what fraction was lost as di-nitrogen gas. Nitrogen is also lost through ammonia volatilization and other channels.

Table 3: Mass balance of nutrients for 2004 candidate technologies* for a standardized 4,320-head finishing farm

More detailed breakdown of N and P fate is included in individual technology reports

** No data provided on land application of N and P. All N and P are assumed to stay in separated liquids and solids. Amount of N and P land applied may be overstated.

*** Includes nitrogen unaccounted for plus nitrogen that was nitrified and denitrified. Calculated as assumed nitrogen excreted minus nitrogen land applied in liquid and in solids. Nitrogen nitrified and denitrified is calculated as the fraction measured as converted to nitrate and subsequently disappeared. Barham, EKOKAN, Recip, and Super Soils converted some nitrogen to nitrate.

**** Phosphorus unaccounted for is calculated as assumed phosphorus excreted minus phosphorus land applied in liquid and in solids and minus phosphorus recovered.

Another result of the analysis is a pair of predicted costs and returns for the anaerobic lagoon and spray field system. These estimates differ from those for the alternative technologies in that they are not for retrofits of existing operations. Instead, they served as an estimate of the existing operating conditions on representative operations prior to retrofit with an alternative system. Assuming a 10 year economic life, 8 percent annual interest rate, and 2004 prices for construction and operation, the predicted cost for a 4,320 head feeder to finish operation was $ 86 per 1,000 pounds SSLW annually over a 10 year period. A second cost prediction was generated assuming 1992 prices for construction and operation, a 15 year economic life, and 8 percent annual interest rate resulting in a predicted cost of $40 per 1,000 pounds SSLW annually over a 15 year period. The estimate based on 1992 prices is closer to the experience of pork producers in North Carolina as no new pork operations have been constructed in North Carolina since a legislative ‘moratorium’ was enacted in 1997.

Sensitivity of Results to Selected Parameters

Predicted costs and returns are sensitive to assumed values. The contractor overhead charge is 43.1 percent of direct capital costs (R. S. Means Company, 1990) where it has been suggested that 20 percent may be sufficient. Similarly, initial investment is amortized over 10 years at an 8 percent annual interest rate with zero net salvage value/removal cost. For example, the annualized direct construction cost would fall by slightly more than half if investments predicted to have a 10 year life were instead assumed to have a 20 year economic life and amortized at a 4 percent annual interest rate. Conversely, the annualized direct construction cost increases by 77 percent if investments predicted to have a 10 year life were assumed to have a 5 year economic life and amortized at a 10 percent annual interest rate. The assumed price charged for electricity ($0.08 per kilowatt hour) consumed is a significant parameter for technologies with high electricity use included in “operating cost”. Finally, the assumption that all separated solids are land applied results in significant increases in net land application costs for technologies that are very effective at separation. If a less expensive or more profitable outlet for solids was found, this cost item could be significantly reduced. It is clearly in the producer’s interest to use the most realistic numbers possible for their operation.

Limitations and Lessons Learned

With every approach to economically evaluate alternative technologies, there are potential limitations and lessons to be learned from the exercise. With this on-farm demonstration study, several of the limitations and lessons learned from this experience are listed below:

1. If technology is unproven on commercial pork operation similar to yours, plan a proven back-up system and acquire performance bonds in case of system/technology failure. A performance bond is a legal document that provides a payment to the client (producer) in the event that the contractor fails to deliver satisfactory performance; for example, if they fail to install a properly functioning manure management system. Typically, the bond is administered by a third party bonding agency in exchange for a fee. In effect, the bond is an insurance contract that pays the producer to offset specified financial damages that may occur if the contractor fails to install a properly working system.

2. If markets for products of the manure management system are unproven or thin, have an alternative outlet planned and a performance bond for the proposed outlets.

3. Farm scale experiments provide substantial insights into the costs and returns of retrofitting operations with technologies. Nonetheless, the data are limited by several factors including:

• Short duration of the experiments limiting insight into costs, returns and performance over time,

• Single site experiments limiting insight into costs, returns, and performance across operations and across types and sizes of operations and across locations,

• Reliance on secondary data and functions as well as expert opinion and assumptions to predict performance, costs and returns of standardized complete systems through time and across operations,

• Lack of data on actual costs of overhead, professional monitoring and oversight of systems, royalties and fees and services provided, and

• Point estimates of prices and production parameters (e.g. manure volume and composition) in the presence of wide ranges and constant change of actual values. Prices of fuel, steel, and electricity have varied widely recently.

4. Predicted cost and returns differ across farm types and farm sizes due to:

• “Lumpiness” of some investments (for example, you must install a whole component even though only a fraction of its’ capacity is required),

• Economies of size and scale (for example, the cost per gallon of storage capacity drops sharply for steel tanks as total volume increases).

5. Assumed parameters have large effects on cost estimates including contractor overhead rate, expected economic life of components and interest rates.

6. Critical design parameters for these systems include volume and composition of manure and wastewater emitted by each operation. Unlike familiar slurry and lagoon systems, many alternative systems must be designed to treat the maximum daily discharge from the barns under the coolest or warmest ambient temperatures of the year. This design requirement arises from the fact that the effluent is treated in a continuous flow or in small batches rather than in a very large cell (such as an anaerobic lagoon or a slurry tank with six months or more of capacity). Therefore, the cost and returns estimates are sensitive to average and range of the volume and composition of barn discharge as well as to the performance characteristics (capacity, percent conversion, etc.) of each system component. Equalization tanks and lift stations are required in some cases to control variations in flow and to feed treatment system components.

7. A large variation exists from operation to operation in manure and wastewater volume and composition per head capacity. Use the actual parameters for your operation to design a manure management system rather than published estimates or someone else’s data.

8. Some technology providers seek to limit the required capacity of their system or improve its’ efficiency by reducing the volume of recycled effluent used to flush barns. Producers have expressed concern that reduced liquid volume may result in solids accumulation in the barns and in sharp declines in air quality in the barns.

9. Cost and return estimates are highly dependent on operating practices which in turn determine environmental effects of manure management systems. For example, the cost of aeration depends on the hours of operation and horsepower of the aeration device which in turn affect the rate of reduction of organic compounds including the conversion of ammonia to nitrate.

10. Markets for by-products and products of manure treatment systems remain a topic for study. Some markets, such as those for fuel and electricity, are large and can absorb the quantities likely to be generated by livestock operations with little price effect. Other markets, such as those for compost or liquid effluent, are smaller or more localized due to high transportation costs and may easily be overwhelmed by the volume generated by pork operations.

11. The pricing structure and availability of subsidies over the length of the investment (e.g. 10 years) appears to vary greatly across states in some markets. For example, electricity pricing in North Carolina may include standby rate schedules for farms that install generators while other states have “net metering”. North Carolina has a fledgling “Green Energy” program that is voluntary while other states may have mandatory minimum green energy purchase requirements.

12. Predicted cost and return estimates for the North Carolina study are net of savings realized by retrofitting existing North Carolina farms and net of income from by-product sales. Predicted costs of retrofitting are net increases in pig production cost on retrofitted operations. Most technology providers are seeking modifications of their technologies to reduce cost or increase effectiveness.

13. Economic analysis remains separate from technical assessments of manure management technology. There is a clear need for integrated assessment of the technical, economic, and environmental performance of devices and systems. Such integrated evaluations and rational design processes will develop systems that are economically efficient at achieving performance goals: both from an on-farm management perspective and from a social environmental management perspective. 13. An increasing number of published works are available on evaluations of alternative manure management systems (see additional resources at end of factsheet)

Summary

The ‘take-home’ message is that manure management devices and systems can be implemented at some cost to both existing and new pork operations. Environmental and other goals and constraints for the manure management system must first be specified. Systems that may meet the needs can be selected for analysis. For example, one system may better address odor reduction at a site where odor reduction is the over-riding goal while another system may be preferred where phosphorus recovery is the over-riding goal. Expert assistance must be acquired in designing and evaluating systems for a specific operation. The most realistic numbers possible for that farm should be used in the design and analysis. Careful partial budgeting can provide useful predictions of costs and returns. Manure management technology will continue to improve at an accelerating rate in concert with changes in pork production technology such as improved diets, genetic improvements, and improved swine housing. As with any investment in new technology, producers must seek assistance from unbiased experts, use the most realistic numbers for their operation, have a healthy dose of skepticism about unproven technologies and thin markets, take steps to limit liability and risk, and make the best informed decision possible.

References Cited and Additional Resources

Fleming R and MacAlpine M. 2003. Evaluation of mechanical liquid/solid manure separators. Ontario Pork proj. 02/39. Ridgetown College. Canada.

N.A. 2002. Low cost alternatives for reducing odour generation. Milestone 5 Rpt. Part B Case Studies of Solids Separation Systems. Australian Pork Limited Proj. 1629.

R. S. Means Company. 1990. Means Estimating Handbook. R. S. Means Company. 1st Edition.

Williams M. 2005. Development of Environmentally Superior Technologies: Phase 2 Rpt. Animal and Poultry Waste Management Center, North Carolina State Univ. Raleigh. http://www.cals.ncsu.edu/waste_mgt/smithfield_projects/phase2report05/phase2report.htm

Williams M. 2006. Development of Environmentally Superior Technologies: Phase 3 Rpt. Animal and Poultry Waste Management Center, North Carolina State Univ. Raleigh. http://www.cals.ncsu.edu/waste_mgt/smithfield_projects/phase3report06/phase3report.htm

Zering K, Atkinson A, Chvosta J, Marra M, Norwood FB, Renkow M, Wossink A, Wohlgenant M, Murray B. 2005a. Cost and returns analysis of manure management systems evaluated in 2004 under the North Carolina attorney general agreements with Smithfield Foods, Premium Standard Farms, and Front Line Farmers.” research report, Dept. Agric. and Resource Econ., North Carolina State Univ.

Zering K, Chvosta J, Atkinson A, Norwood, FB. 2005b. Cost and returns analysis of manure management systems evaluated under the North Carolina attorney general agreements

with Smithfield Foods, Premium Standard Farms, and Front Line Farmers. Proc. 2005 Anim. Waste Management Symp., North Carolina State Univ. pp. 37-46.

Zering K, Atkinson A, Chvosta J, Marra M, Norwood FB, Renkow M, Wossink A, Wohlgenant M, Murray B. 2006. Cost and returns analysis of manure management systems evaluated in 2005 under the North Carolina attorney general agreements with Smithfield Foods, Premium Standard Farms, and Front Line Farmers.” research report, Dept. Agric. and Resource Econ., North Carolina State Univ

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