Research Accomplishment Reports 2007

Risk Management and Profit Potential of Alternative Production Practices, Enterprises and Technologies

C. Dillon
Department of Agricultural Economics

 

Project Description

This research project has provided methodological, theoretical and empirical contributions to the multidisciplinary framework of farm management. The methodological contributions include novel mathematical programming formulations and applications. The melding of nonlinear and mixed integer programming models for assessing farmer's maximum willingness to pay and for precision management zone delineation are examples, incorporating Boolean logic to model the need for continuous management zones. Novel application of the traveling salesperson integer programming formulation to the application of factors of production to reduce risk is another contribution.

This project has seen the development of the original formulation to distinguish between uniform rate and variable rate input application through the use of ratio constraint procedures. The theoretical contributions of this research project have involved the impacts of interactions among production practices and the importance of risk in economic modeling. This included the development of a testing procedure for appropriate mean-variance analysis extending Meyer's seminal linkage to the expected utility hypothesis. This research also has demonstrated the need to consider multiple interactions to properly determine optimal production strategies. The empirical contributions associated with this research project include evaluation of numerous precision agriculture practices for profitability and risk management as well as optimal management strategies.

Impact

Whole farm modeling has been the primary focus of this work and highlights both the need for inclusion of risk considerations and the not infrequent change in optimal strategies when considering interactions between production practices. This research has included optimal management zone delineation to identify the economically optimum configuration of subfield areas to be managed as separate units. Another example is the optimal path of variable rate application of factors of production. Furthermore, economic analysis of the novel application of polymer coating on seeds to permit varying germination dates has been conducted. Break-even acreage to justify equipment ownership versus custom hiring, risk management potential of spatially selective enrollment in the Conservation Reserve Program (CRP) and strategic management strategies of spatially selective removal of land from production are also examples of contributions from this project. Precision livestock economics (forage production and feeding) and precision agribusiness service provider research are recent expansions undertaken in this project.

Generally, this research has demonstrated that strategic (long run) decisions have as much potential under precision agriculture as the more common tactical (short run) decisions. For example, the use of precision agriculture economic criterion rather than full enrollment of eligible CRP resulted in net returns that were more than double on that portion of the field in a case study. Furthermore, evidence from this project shows that the value of precision agriculture to reduce production risk is often at least as valuable as increased profitability. As an example, the benefits of the combination of variable rate seeding and germination date (via polymer seed coating) over and above traditional field average ranges from $7.91/acre under risk neutrality to $27.66/acre under high risk aversion.

More recent impacts of this research include economic benefits through variable rate fertilizer application and timing as well as investigation of variable rate nozzle control. Variable rate fertilizer application and timing of application should be considered as fertilizer prices increase but its profitability might be affected more than uniform rate. The representative commercial sized crop farm examined had gains of over $1500 per year for the business. The commonly held belief that increased fertilizer prices must lead to greater profitability of variable rate application is not supported meaning farmers should be careful in making the switch to variable rate on that basis alone. The substantial opportunity of variable nozzle control technology was also economically demonstrated. Input expense savings alone would justify the adoption of variable rate nozzle control technology in many cases. Equipment allowing separate nozzle control had a gain of $1.39/acre for the base scenario examined. The overall impact of this research has included enhanced profitability, reduced risk and insights on adoption decisions and identification of the accompanying improved managerial and production practices which have led to these economic benefits

Publications

Dillon, C.R., S. Shearer, J. Fulton and S. Pitla. "Improved Profitability via Enhanced Variable Rate Application Management in Grain Crop Production" Proceedings of the 6th European Conference on Precision Agriculture. J Stafford, ed. Skiathos, Greece. June 3-6, 2007. 819-825.

Dillon, C.R., T.S. Stombaugh, B. Kayrouz, J. Salim and B.K. Koostra. "An Educational Workshop on the Use of Precision Agriculture as a Risk Management Tool" Proceedings of the 6th European Conference on Precision Agriculture. J Stafford, ed. Skiathos, Greece. June 3-6, 2007. 861-867.

Gandonou, J. and C.R. Dillon. "Precision Timing and Spatial Allocation of Economic Fertilizer Application Considering Suitable Field Days" Proceedings of the 6th European Conference on Precision Agriculture. J Stafford, ed. Skiathos, Greece. June 3-6, 2007. 737-743.

Shockley, J.M., C.R. Dillon and S. Saghaian. "Precision Agriculture Adoption and the Optimal Location of Technology Providers in Kentucky, USA." Proceedings of the 6th European Conference on Precision Agriculture. J Stafford, ed. Skiathos, Greece. June 3-6, 2007. 769-773.