The importance for understanding how you use a product is due to the potential ramifications of the application. A soil amendment typically refers to a product intended to be incorporated into the soil, and therefore, is generally well-decomposed. A top dressing generally refers to a product which will be laid on top of the soil and, therefore, may not be well-decomposed if at all.
Since those ramifications can be pretty extreme, you need to have a clear idea of your desired goal prior to making a final decision on the product you select.
Top dressing garden beds and/or around trees is an excellent idea for many reasons, not the least of which the benefits it gives to the soil. Bare soil is subject to degradation in many forms: wind and water erosion, compaction from rain and irrigation, soil microbes die off in barren soil, the soil can heat up enough to damage roots. For more details, refer to my blog Benefits of Tree Islands
Nature doesn’t like a vacuum; if there is an empty space, an organism is going to try to fill it up as soon as possible. Weeds love bare soil; they are the ultimate pioneer species. those are the species which come in and colonize abandoned, disturbed, or bare sites and can thrive in adverse conditions.
Top dressing is a product you apply to the surface of the soil for a variety of reasons including (but not limited to): moisture retention, temperature moderation, erosion control from wind and/or rain, reduction of crusting due to rain and/or sprinklers, weed suppression, slow incorporation of organic matter facilitated by soil organisms, slow release of nutrients made plant available by soil organisms.
I am not a fan of using inorganic products such as pea gravel and rocks around trees and shrubs. The above list of benefits is best achieved when using organic products.
Organic products used as top dressing may have a high carbon-to-nitrogen ratio (C:N) as they are not well-decomposed. this generally means the ratio is 25:1 or higher. It takes longer to break down and provides a slow incorporation of organic matter to the soil as worms and other soil organisms process it. Common products include pine needles, bark chips, cardboard, or whole tree chips.
Whole tree chips refer to all components of a tree: leaves, twigs, wood and bark. We, personally, prefer whole tree chips because they have more of the components utilized by trees rather than just a single component.
If you are using top dressing to create a tree island, a flower bed or pathway, the goal might be weed suppression as well as other benefits and, in that case, using a product with a high C:N ratio which will take longer to break down is a good choice.
You certainly may use a partially or well-decomposed product as a top dressing but it may not achieve your desired goals if weed suppression is one of them. Well-decomposed product is already a growing medium (which is what makes it suitable to incorporate into the soil).
For more detail on why you don’t want to use a product with a high C:N ratio as an amendment which will be incorporated into the soil, please refer to my blog Will Adding Mulch Tie Up Nitrogen in the Soil?
Soil amendments are products you wish to incorporate INTO the soil. The reasons might be to increase the organic matter content sooner rather than later. Soil organic matter (SOM) is vastly important to the health of the soil, the soil organisms and the plants growing in the soil. It positively influences or modifies virtually all soil properties, including but certainly not limited to improvement in infiltration and percolation of water, increased nutrient exchange capacity, water-holding capacity and aeration. Amendments should have a C:N ratio of no more than 24:1. This may be a product you purchase or a compost made in your backyard.
Whether you are purchasing an amendment or have made the compost yourself, double check it is in fact well-decomposed prior to digging in. Criteria generally cited for “well-decomposed” are: it should smell “good”, be dark brown and crumbly.
The “good” smell is that wonderful earthy smell. It should not smell stale or like rotten eggs. This would indicate it is not thoroughly composted, is anaerobic or has other serious issues you don’t want.
The dark brown coloration is indicative of decomposed organic matter. The texture of the product should crumble readily; in fact, you should not be able to discern its origin.
If the product does not meet all of these criteria, I would hesitate to incorporate it into the soil. If it smells good but still has hard pieces in it, you can use it for top dressing, letting it decompose more fully on site.
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