Land Use Decisions Using Precision Agriculture

Carl Dillon

Agricultural Economics

Discussion Outline

• How can precision agriculture be used?

• Output-Output Model

• Partial Budgeting

• Break-even Analysis

• CRP Enrollment

Learning Outcomes

• You should be able to develop and apply a produce/don’t produce decision rule

• Develop and apply a CRP enrollment decision rule (or other payment type)

• Display comprehension of the economic theory of enterprise selection

• Use a partial budget

How can PA be used?

• To make and implement decisions

• Tactical decisions

• Strategic decisions

Tactical Decisions

• Seasonal or short run aspects

• VRT - variable rate technology

• Grid sampling

• Crop mix

• Production practices (planting date, seeding rate, variety, etc.)

• Others

Strategic Decisions

• Multiple year, long run decisions

• CRP (Conservation Reserve Program) enrollment and similar

• Possibly - produce or not

• Purchase of PA equipment

• Land purchase or improvements

• Others

Output Substitution

• Answers the question “What should I produce?”

• Examples - corn or soybeans, cattle or hogs, CRP or commodity

• What are the three steps in applying economic production decision rules? - physical data, economic data, apply rule

Production Possibility Curve

• Physical relationship

• Also production possibility frontier

• Shows all possible output (enterprise) combinations for a given set of inputs

• MRT - Marginal Rate of Transformation, the slope of the PPC, the rate at which one output can replace another

Competitive Enterprises - Nonlinear

Output Ratios

• Output substitution ratio = Y1 / Y2

• Amount of Lost Output /Amount of Gained Output

• Output price ratio = Py2/Py1

• Price of Output Gained/Price of Output Lost

Profit Maximizing Enterprise Combination Rule

Y1/Y2 = Py2/Py1

• Gross Revenue = Py1Y1 + Py2Y2

• GR - Py2Y2=Py1Y1

• GR/Py1 - Py2/Py1Y2 = Y1

• The additional revenue from production are equal across all outputs for profit maximization

Profit Maximizing Enterprise Combination

Profit Maximizing Enterprise Combination

Slopes

• Slope of PPC is MRT

• Slope of gross revenue is output price ratio

• The tangency point is where the two slopes are equal which gives the maximum revenue

Output Substitution WorksheetPy2 = 1 Py1 = 3

Enter.Mix Y2 Y1

OutputSubs.Ratio

OutputPriceRatio

Valueof

Prod.A 0 500 NA NA 1500

B 150 450 0.33 0.33 1500

C 300 300 1.00 0.33 1200

D 450 0 2.00 0.33 450

Partial Budget

• Answers “Should I make a change?”

• Can include output-output model

• Estimate of changes in income, expenses and profits associated with a proposed modification in the whole farm plan

• Examples of possible changes?

Partial Budget Aspects

• Allows managers to make adjustments

• “Fine-tuning”

• Consider interactions consciously

• Focus on marginal - things that actually change from implementing the new plan

• If it doesn’t change, don’t include it

Four Things Can Happen as a Part of a Change:

• Additional Revenue

• Reduced Revenue

• Additional Costs

• Reduced Costs

• Additional revenue and reduced costs raise profits

• Reduced revenue and additional costs lowers profits

Partial Budget Advantages

• Enterprise substitution (PPC), input substitution (isoquant), level (production function) or size/scale of operation (all 3)

• Simplifies task involving complex decisions

• Forces consideration of marginal economics

• Encourages considering change -simple tool

Partial Budget Disadvantages

• Can still be cumbersome with complex changes

• Economic evaluation not always a physically feasible evaluation

• Many small changes are possible but not enough time to evaluate them all with partial budgeting

Partial Budget Example - Stop Production on Marginal Land

Add. Costs : Add. Rev. : None 0 None 0

Red. Rev. : Red. Costs: Corn sales 210 Var. costs 180 Total AC+RR 210 Total AR+RC 180 (AR+RC) - (AC+RR)= -$30

Partial Budget Example - Enroll in CRP

Add. Costs : Add. Rev. : Establishmentand Maint.

5 CRP payment 150

Red. Rev. : Red. Costs: Corn sales 210 Var. costs 180 Total AC+RR 215 Total AR+RC 330 (AR+RC) - (AC+RR)= +$115

Considerations

• Economies of size (e.g. 20% increase in size may not increase labor 20%)

• Opportunity cost (e.g. leisure time value)

• Risks should be reflected (up/down)

• Feasibility (physically possible, resource requirements)

• Desirability (noneconomic goals)

To Produce or Not, That is the Question

• Example of big potential gains in strategic decisions

• If you don’t cover your operating costs, don’t produce

• Yield maps highlighting less than break-even point

Break-even Analysis for CRP Enrollment Example

• (AR+RC) - (AC+RR) = 0

• (CRP + VC) - (EST + MAINT + P*Y) = 0

• P*Y = CRP + VC - EST - MAINT

• Y = (CRP + VC - EST - MAINT)/P

CRP Enrollment Example

• Lower producing, qualifying areas of the field

• Similar to produce or not

• Depends on whether owned land, cash rent or crop share

• Reduced risk should be considered

• Decision aid being developed

All areas eligible for buffer strips

Areas that meet NRCS and break-even criteria

Resulting Strips

Other Factors

• Land tenure arrangement - owned, cash rent, crop share, cost share

• Willingness and ability to bear risk - CRP is a constant payment versus uncertain yield level

Conclusions

• PA is an opportunity to make or lose money

• It can be used to make and implement decisions

• Break-even analysis can be used to answer whether to produce or not as well as whether or not to enroll in CRP or similar opportunities