Role of economics in developing fertilizer best management practices

Abstract

To reduce agricultural water quality impacts, many US states and other countries rely on agricultural best management practices (BMPs). Although fertilizer BMP rates are supposed to ensure the economic viability of agricultural production, BMPs are frequently based on agronomic, rather than economic, research; moreover, some producers resist BMP adoption, citing profit reductions. In this study, we examine the effect of production and market risks, as well as producers’ risk aversion, on producers’ fertilizer rate and BMP adoption decisions. We focus on potato production in the Lower St. Johns River Basin, northern Florida. Using historical data, we estimate the linear stochastic plateau production function that explicitly incorporates production risks related to weather. We develop a financial model and use Monte Carlo simulation and empirical fertilizer and potato sale price distributions to estimate the distributions of ten-year net present values (NPVs) for alternative fertilizer rates. The results show that the preferred fertilizer rate depends on the assumption about potato sale prices and producers’ risk aversion levels. Risk-neutral producers prefer lower fertilizer rates than do risk-averse producers to avoid the downward risk caused by the high fertilizer expense and low yields. BMP adoption can also lead to profit loss when the BMP is designed for a low price scenario while market conditions are favorable. Hence, BMP development should be based on comprehensive analysis of production and market risks, as well as producers’ risk perceptions. It should also be recognized that to achieve water quality targets, BMP adoption may lead to reductions in profits if a subset of possible production and/or market conditions are realized. Insurance-type policies to compensate agricultural producers for the profit losses may be developed.