Cost Benefit Analysis Using Monte Carlo Simulations on Regenerative Agricultural Practices of Growing Processing Tomatoes in California’s Central Valley

Abstract

Conventional agriculture has damaged the world’s soils and rendered future food supplies uncertain, while climate change has worsened water scarcity in many regions. Regenerative agriculture practices are considered to be a solution to climate change and food security. Loosely defined, regenerative agriculture encompasses practices that improve soil health, reduce irrigation demand, and reduce harmful inputs or operations that degrade soil quality. Farmers can obtain a Regenerative Organic certification to be recognized for adopting regenerative practices and to label their products as Regenerative Organic and sell at a higher premium. The cost and benefits of adopting three common regenerative practices (cover crops, compost application, and no-till farming) on an average processing tomato farm in the Central Valley of California was used to develop a whole farm budget. Then a Monte Carlo approach to conduct a cost benefit analysis (CBA) over 30 years was used to simulate different hypothetical climate and economic scenarios in order to understand the economic viability of regenerative practices. Sensitivity analyses was also conducted to examine various hypothetical changes, such as increased water costs, government incentives, changes in crop yield, and price premiums for the crop. This study estimated the cumulative net present value (NPV) of several hypothetical scenarios. The results from this study showed that under normal water conditions, using conventional agricultural practices to farm processing tomatoes is more profitable, with an NPV of $9,394 per acre compared to using regenerative practices, with a NPV of -$7,819 per acre. There are obvious difficulties growing a water demanding crop, such as processing tomatoes, in a water scarce region, such as California’s Central Valley. When a hypothetical scenario of water scarcity and rising water costs was simulated in the CBA, both regenerative and conventional scenarios were unprofitable unless high yields were experienced in regenerative farms. Conventional operations quickly lose profitability with rising water costs but better water retention capabilities allowed regenerative agriculture to be slightly more resilient than conventional. Sensitivity analyses showed that changes in yield and price premiums can more drastically affect the economic outcome of the regenerative farm. Low yield or low price premiums have a high likelihood of an unprofitable operation, but high yields and price premiums can greatly increase chance of a regenerative farm becoming profitable. However, the adoption of regenerative practices is not economically viable in the long run without incentives and deficit irrigation. This study also found that in order for the Silver Regenerative Organic Certification to be economically viable, farmers must receive at least 70% higher price premium. This study aimed to demonstrate a novel simulation approach to conducting CBAs in order to generate insight on the potential economic outcomes of adopting regenerative practices. The outcomes suggest that as long as drought continues to devastate California, water demanding crops will be unprofitable in both conventional and regenerative operations.