Flat earth economics and site-specific crop management: how flat is flat?

Abstract

The practical significance of achieving optimality in on-farm decision making has been debated in the agricultural economics literature since the 1950s, with some arguing that optimal input application is less critical if farmers are faced with a flat pay-off function. This issue has considerable implications for the adoption of site-specific crop management (SSCM), where the optimal management of inputs across space is emphasised. This paper contributes to this debate by addressing some previously unresolved issues. Firstly, a new metric is proposed, termed ‘relative curvature’ (RC), that is used for more accurate and versatile quantification of the flatness of pay-off functions. Secondly, this metric is used to compare the difference in profitability between management classes within the same field, where SSCM is practiced. Thirdly, the RC metric is used to examine the effect of considering environmental damage costs from non-optimal input application on the flatness of pay-off functions. The key findings of this paper are that there exists a high degree of variability in relative curvature of pay-off functions derived for different management classes within the same field. The RC procedure can be used to identify fields which are most suitable to variable-rate management intervention. Also, RC increases substantially when environmental costs are accounted for, implying that optimality of input use may be more important than previously thought.