312 – The economics of nitrogen in agriculture

The global challenge of feeding seven billion people would be more difficult without nitrogen fertilizer, but it causes pollution of rivers, lakes and coastal waters around the world, and it contributes to emissions of greenhouse gases. It increases the profitability of individual farmers, but it is over-applied in many cases, wasting money and needlessly worsening environmental problems.

These are, in large part, economic issues. In a recent paper I attempted to summarise the large and diverse research literatures on the economics of nitrogen in agriculture. Here are some of the key points.

At the farm level

The production function for nitrogen (N) fertilizer (the relationship between yield and the rate of nitrogen fertilizer) always exhibits diminishing marginal returns – it flattens out at higher fertilizer rates. In dry conditions, yield may even fall at high N rates.

The rate of nitrogen fertilizer that maximises expected profit is less than the rate that maximises expected yield, sometimes much less.

Here’s a really neat tool that shows the relationships between N, yield and profit for corn in the US. http://cnrc.agron.iastate.edu/

Visual effect of nitrogen fertilizer on corn

Risk

N fertilizer affects the riskiness of cropping. For two reasons, higher N rates are more risky (i.e. profits are more variable at higher N rates). One reason is that the grain price is itself risky. Since profit depends on grain price times yield, and yield usually increases with increasing N rate, the more N you apply, the more variable your profit will be. In addition, yield also tends to be slightly more variable at higher N rates.

Flat payoff functions

There always exists a range of fertilizer rates that are only slightly less profitable than the profit-maximising rate (i.e. a range where the payoff function is relatively flat), and in most cases, that flat range is wide. This means that the farmer has flexibility in choosing the fertilizer rate. If a lower rate would better satisfy another objective (e.g. risk reduction), the farmer can choose that rate with little sacrifice of profit. If regulators require a moderate reduction in fertilizer rate below the farmer’s economic optimum, the cost to the farmer will be small. Flat payoff functions also mean that the benefits of precision-agriculture technologies that spatially adjust fertilizer rates within a field will usually be small.

Nitrogen pollution

Typically, the marginal cost to farmers of nitrogen emissions abatement is low for low levels of abatement but increases at an increasing rate as the required level of abatement increases. As a result, modest targets for abatement can often be achieved at low cost, but ambitious targets can be extremely costly.

Spatial targeting of abatement effort (both at the regional and international scales) can generate much larger benefits than untargeted policies, although these additional benefits are likely to be offset to some degree by increased costs required to run a targeted program (costs of information and administration).

Policies intended to increase farmers’ incomes can have the unintended consequence of increasing nitrogen pollution by increasing the incentive to apply fertilizer.

Further reading

Pannell, D.J. (2017). Economic perspectives on nitrogen in farming systems: managing trade-offs between production, risk and the environment, Soil Research 55, 473-478. Journal web page

Gandorfer, M., Pannell, D.J. and Meyer-Aurich, A. (2011). Analyzing the Effects of Risk and Uncertainty on Optimal Tillage and Nitrogen Fertilizer Intensity for field crops in Germany, Agricultural Systems 104(8), 615-622. Journal web page ♦ IDEAS page

Schilizzi, S. and Pannell, D.J. (2001). The economics of nitrogen fixation, Agronomie 21(6/7), 527-538.

Pannell, D.J. and Falconer, D.A. (1988). The relative contributions to profit of fixed and applied nitrogen in a crop‑livestock farm system, Agricultural Systems 26(1), 1‑17. Journal web page ♦ IDEAS page

Pannell, D.J. (2006). Flat-earth economics: The far-reaching consequences of flat payoff functions in economic decision making, Review of Agricultural Economics 28(4), 553-566. Journal web page ♦ IDEAS page

2 Comments

  • Brett Robinson
    7 February, 2018 - 10:03 am | link

    Hello David. Thank you for a very interesting article. In particular I enjoyed the description of the “flat” response curves ($ profit vs N rate). Farmers have learned that empirically from an early age while researchers have to be diseducated of their textbook education showing steep response curves. An understanding of the differences betwee one-off responses and long-term responses is key in this (Peter Hayman described this in the 1990s).
    While teavelling in SE Asia I’ve seen cultural aspects of N fertiliser use that go way beyond the “believe in it, use plenty” vs “don’t trust it, use as little as possible” attitudes in Australia. In Laos, with a low population density and other factors, there is utter disdain for fertilisers. Across the border in Vietnam, with very high population density, there is a huge desire for fertilisers, especially “urae”. This makes no agronomic sense, as many soils in Cambodia are low in just about everything. Derived from sandstone they were depleted and exhausted centuries ago – possibly the cause of the fall of the Angkor Empire in the 1400s, but that’s another story.
    So despite the low yields and associated malnourishment and starvation, Khmer people take pride that they grow “organic, natural” food. The distrust of plants that have been “injected”, “expanded” and “filled with water” is overwhelming. It is possibly reinforced by the totalitarian government, which still has strong links to the agrarian tegime of the Khmer Rouge and Pol Pot.
    Across the border in Vietnam there are vast areas that are heavily polluted with nutrient-rich runoff. Not to mention the daily nutrient deposition of 95 million people eating highly fertilised plants.
    But I’ve gone way off track. Thanks again for the article.

  • John Holmes
    7 February, 2018 - 3:16 pm | link

    A couple of news notes which may of of significance re N in Agric.

    https://www.motherjones.com/environment/2018/01/researchers-just-found-a-hidden-cause-of-californias-smog-problem/

    See also

    http://www.abc.net.au/news/science/2018-02-06/lower-stratosphere-atmosphere-ozone-layer-decline-climate/9400164?utm_source=sfmc&utm_medium=email&utm_campaign=%3a8935&user_id=0edf00b0f65154837702ec3621d3181a3e02b20339a828ec3a8ed3281bae1dc6&WT.tsrc=email&WT.mc_id=Email%7c%7c8935&utm_content=ABCNewsmail_topstories_articlelink

    Is the issue of nitrogen oxides destroying ozone only a problem from a particular localized area (Calf.), or is it a more general issue re N fertilizers?

    The South / SE Asian brown cloud could also need some examination re this.

    Equipment such as “Green Seeker” should be of use here to fine tune the application of N to crops at a square meter level. That assumes that we know enough to accurately interpret the measurements made of the ‘colour of the crop and N levels” to calculate the amount needed and then deliver it where needed.

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