Economic Perspective on Grasslands, Biodiversity and Weather Extremes

Abstract

Grasslands cover large shares of the world’s terrestrial area and are essential for the global food security as well as for the agricultural economy as they provide feed for animals. The same grasslands are a host of biodiversity and provide a wide range of other ecosystem services. Changes in the climatic conditions, population, consumer demands and policies, which put pressure on grasslands and grassland-based production, requires farmers to adapt. For farmers and their utility, two aspects are especially important in this context: expected income and stability of income, i.e. income risk. Farmers have a set of tools to adapt and influence grassland production, including the choice of the (plant) species diversity level in their grassland. Species diversity have been shown to increase yields and yield stability as well as that it can mitigate adverse effects of weather extremes, such as droughts. A key challenge is to transform these findings also into economic terms and to quantify these potential benefits of species diversity in terms of farmers’ utility. Empirical economic assessments of the effects of species diversity (‘diversity effects’) in grasslands that aim to value these effects from farmers’ perspectives have been conducted only in a limited number. Those studies that did such economic assessment usually focused on biomass yields (i.e. quantity of yield) and extensively managed grasslands and neglected essential aspects for farmers, such as forage quality, different management intensities, extreme weather events (e.g. droughts), market responses (e.g. hay prices) or differences in farm types. Droughts that are a severe risk for grasslands are predicted to increase in frequency and intensity in the future due to climate change. Understanding the economic consequences of drought effects and how species diversity, among other tools, can help to reduce adverse effects is important. Moreover, droughts can not only cause yield losses but also market response (e.g. hay prices response), which are equally important to farmers but not explored so far. The overall research goal of the thesis is to support farmers, extension services and policy makers by answering the question ‘What is the value of species diversity in grasslands for farmers?’. Therefore, we conduct an economic valuation of the diversity effect in grasslands from a farmers’ perspective in Chapter 2 to 4: In Chapter 2, we economically assess the diversity effects on expected yields, expected revenues and risk in intensively managed grasslands, considering biomass yields and forage quality. We find that species diversity increased biomass yields while it did not affect forage quality. Thus, species diversity increased quality-adjusted yields (biomass yields x forage quality) and potential revenues from milk production. Moreover, species diversity decreased farmers’ risk. In Chapter 3, we investigate the diversity effect on expected yields and revenues, considering biomass yields and forage quality across a wide range of management intensities. The results show that species diversity increased quality-adjusted yields and revenues across management regimes and that the benefits from species diversity can be as high as increasing management intensity. In Chapter 4, we analyze the diversity effect under increasing drought risks while considering hay yield and price responses to droughts as well as different farm types. We find that species diversity increased income and decreased risk. The diversity effect was independent of drought probability and the drought effect largely dependent on farm type. We complement the economic assessment of species diversity by an in-depth analysis of droughts effect hay prices and differences between drought effects on hay prices and feed grain prices (Chapter 5). We find that regional and national droughts substantially increased hay prices while feed grain prices were not affected in South Germany. The differences between hay and feed grain price responses can be linked to transport and transaction costs, thus, to market integration. Moreover, we provide supplementary analysis about biodiversity loss communication, public interest in biodiversity in climate change and societal concerns on pesticide use in the appendices of the thesis. In conclusion, the thesis adds to the existing knowledge of species diversity and its economic value by extending the (economic) assessment of species diversity. Considering key aspects for farmers, we show that species diversity is an economically relevant factor of production and that maintaining and reestablishing species diverse grasslands can contribute to future sustainable intensification of grassland-based production. Moreover, we provide new insights to the consequences of droughts on hay and feed grain prices and that these prices are differently affected. The knowledge on these drought effects on prices in combination with diversity effects in grasslands can help to better understand and mitigate adverse drought effects in grassland-based production, especially considering climate change. The gained insights in this thesis, about the species diversity effects and the drought effects, should be considered in farm management as well as in the decisions of policy makers.