Economics of Variable-Rate Fertilizer Application

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Economics of Variable-Rate Fertilizer Application

• Carl Dillon
• Agricultural Economics

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Application of Economic Principles

• 1. Acquire physical/biological data (production
  technology)
• 2. Acquire price data (production economics)
• 3. Apply appropriate decision-making rule

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Marginal Concepts

• Management focuses on controllable factors
• Economics considers marginal aspects
• Marginal - incremental change, additional, extra

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Production Function

• Systematic representation of the output or yield
  of a product corresponding to different amounts
  of an input
• Table, graph, equation
• TPP, Y
• Physical relationship but important

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Physical Product

• Total Physical Product Yield
• Average Physical Product TPP/X
• Marginal Physical Product ? TPP/ ? X

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Production Function Worksheet
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Production Function Worksheet
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Graphical Production Function

• How to draw a classical production function
• Stages of production

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Total Physical Product Curve
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Average and Marginal Physical Product Curves
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Stages and Relationships
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Production Function Points

• Inflection point at maximum MPP
• TPP maximum at MPP 0
• A production function doesnt necessarily have
  all three stages

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Law of Diminishing Marginal Returns

• As additional units of a variable input are used
  in combination with one or more fixed inputs, MPP
  will eventually begin to decline
• The world cant be fed from one acre
• Measured in MPP not TPP or APP
• Can begin with first unit
• IN stage one NOT the border of I and II

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Adding Economics

• Where is the profit maximizing input level?
• Py Price of output
• Px Price of input
• Total Value Product (TVP) TPP Py
• Marginal Value Product (MVP) MPP Py
• Total Input Cost (TIC) X Px
• Marginal Input Cost (MIC) Px

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Production Economic WorksheetPy 2 Px
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Input Decision Rule

• TVP Total value product Py Y
• TIC Total input costs PxX
• Profit TVP - TIC
• ? Profit / ? X 0
• ? (TVP - TIC) / ? X MVP - MIC 0

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Input Decision Rule

• MVPMIC for profit max
• NOT maximum yield if you want to maximize PROFIT!
• Marginal benefits Marginal cost
• An equality, not an equation

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Economics of VRA

• Use MVPMIC by spatial location for VRA
• Use land area weighted average MVPMIC for
  uniform rate profit maximization
• If change in net returns from VRA outweighs cost
  of the technology then VRA is profit maximizing

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Some VRA Myths

• VRA will never result in higher total farm input
  usage versus uniform rate
• An increase in input price always leads to
  greater economic potential of VRA
• VRA requires a high amount of spatial variability

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Sensitivity Analysis

• Assessing the impacts of a change in the
  decision-making environment on the optimal
  decision
• Economic environment changes - output price,
  input price
• Physical environment changes - productivity

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Conclusions

• Profit maximizing input level and yield
  maximizing input level are different
• The optimal input level is a function of output
  price and input price as well as the underlying
  production function
• Input decision rule is MVP MIC
• Sensitivity analysis can be useful