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 =  Y 1 /  Y 2 Amount of Lost Output /Amount of Gained Output Output price ratio = Py 2 /Py 1 Price of Output Gained/Price of Output Lost

Profit Maximizing Enterprise Combination Rule  Y 1 /  Y 2 = Py 2 /Py 1 Gross Revenue = Py 1 Y 1 + Py 2 Y 2 GR - Py 2 Y 2 =Py 1 Y 1 GR/Py 1 - Py 2 /Py 1 Y 2 = Y 1 The additional revenue from production are equal across all outputs for profit maximization

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 Worksheet Py 2 = 1 Py 1 = 3

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

Partial Budget Example - Enroll in CRP

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

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