How nitrogen trading between farmers could lower mitigation costs

The Stakeholder Advisory Group (known as StAG) has spent a lot of time determining how nitrogen mitigation could be shared around the Rotorua catchment.  At the heart of this discussion has been working out what the fairest way to share costs among farmers would be, recognising their different farm systems and geophysical limitations.  The next challenge is tackling nutrient trading and looking at what benefits and risks there might be for farmers.

Nitrogen Discharge Allowances (NDAs) are at the heart of the draft nitrogen rules currently being developed by Bay of Plenty Regional Council. Nutrient trading may be a useful mechanism for helping to meet these NDA targets.

Because no two farms are the same, the costs of reducing nitrogen losses vary a lot around the catchment.  Some farms may be able to make relatively low cost reductions while others face much higher costs per kg of nitrogen.  Nutrient trading allows reductions to happen where they are cheapest first, with farmers splitting the difference on the cost.  Trading might be long-term (changing the allocated Nitrogen Discharge Allowances for a farm) or short-term (through leasing).

Here are some examples of how trading might work:

Long term trades:

• Farmer A has been allocated a 50kgN/ha/yr Nitrogen Discharge Allowance (NDA) for their farm. After investing in a stand-off pad to enable on-off grazing during winter, farmer A decides they will only need 45kgN/ha/yr, so sells off 5kgN/ha/yr. The revenue generated from this sale can be used to offset the extra capital cost of investment.
• Farmer B has been allocated 50kgN/ha/y, but after trialling out a range of options, finds they can’t get their N loss below 55kgN/ha/y without a big costly drop in pasture quality. Farmer B finds it is cheaper to buy 5kgN/ha/y of allowance off Farmer A than to accept the drop in pasture quality.

It’s important to note that both farmers are still facing costs – but they are less than if they were both locked into their initial NDAs.

Short term trades through leasing:

• Farmer C wants to trial a new fodder crop for five years but needs 200 kgN/yr additional to her NDA.
• Farmer D has adopted a lower intensity system for lifestyle reasons but is reluctant to permanently sell N as that would limit long-term stock options. The farm’s current N loss is under its NDA and it leases 200 kgN/year of leaching rights to Farmer C.  Farmer D gets a little extra revenue for five years without having to change their allocation.

The 2032 date for achieving NDA targets is still a long way off in terms of understanding what our farm systems will look like and what the relative costs of N might be.  However, as long as farm systems are different, trading will mean lower costs than being locked into an initial NDA.

From Ollie Parsons, DairyNZ