Balancing yield, price and risk in nitrogen spend

Author: | Date: 28 Feb 2018

Caption: David Pannell believes Western Australian grain growers may be eroding their profit margins by applying too much nitrogen to crops.

Western Australian grain growers may be eroding their profit margins by applying too much nitrogen to crops.

This finding stems from Western Australian-led research into the economics and trade-offs between production, risk and the environment when using this key nutrient in farming systems.

The project is being carried out by Professor David Pannell, of The University of Western Australia’s (UWA) School of Agriculture and Environment, who outlined key results at the Grains Research and Development Corporation (GRDC) Grains Research Update, Perth.

Professor Pannell’s investigation into the economics of nitrogen use is part of a wider national project with support from the Australian Research Council (ARC) Centre of Excellence for Environmental Decisions.

He said the optimal level of nitrogen fertiliser to use on-farm was individual and depended on technical issues (such as crop type, soil type and rainfall) and socio-economic factors (such as grain and fertiliser prices, business objectives and risk attitudes).

“Sometimes farmers are tempted to fertilise for maximum yield, but the rate of nitrogen needed to achieve the best profits from crops is always less than the yield-maximising rate,” he said.

“If the price of grain rises, or the price of fertiliser falls, optimal nitrogen rate increases (and vice versa) - even in the absence of any yield gains.

“This means the pursuit of better crop nitrogen use efficiency - by adjusting fertiliser rates – is not the criterion for maximising profits. It can erode profits if it cuts the nitrogen rate below the optimal profit-maximising rate.”

Professor Pannell highlighted a misconception about the role of nitrogen in on-farm risk management.

“Some growers believe that applying additional fertiliser serves as a kind of ‘insurance policy’ and will reduce their risks,” he said.

“But economic analysis shows higher nitrogen rates tend to be slightly riskier overall – and have greater unpredictability of profits.”

Professor Pannell said there is typically a ‘flat pay-off function’ for nitrogen, which is the range of fertiliser rates that are only slightly less profitable than the profit-maximising rate. In most cases, this ‘flat’ part of the pay-off function is wide.

“It means there is little economic incentive for growers to achieve a precise economic optimum level of nitrogen application,” he said.

“If they are using too much or too little - for whatever reason – they can often continue to do so without sacrificing much profit.

“Understanding the economics of nitrogen use can help growers improve their own analysis of the benefits and costs of a range of fertiliser rates, with the end goal of maximising profits and reducing business and environmental risks.”

Click here for Professor Pannell’s full GRDC Grains Research Update paper.

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Professor David Pannell
The University of Western Australia
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