nitrogen, tillage, risk, risk aversion, Crop Production/Industries, Farm Management, Production Economics, Risk and Uncertainty,

Gandorfer, Markus

Meyer-Aurich, Andreas

Pannell, David J.

English

Research Papers in Economics

Whole Farm Modeling of the Effect of Risk  
on Optimal Tillage and Nitrogen Fertilizer Intensity 
 
 
 
 
 
Markus Gandorfer  
Institute of Agricultural Economics and Farm Management 
Technische Universität München 
markus.gandorfer@wzw.tum.de  
 
David J. Pannell  
School of Agricultural and Resource Economics,  
University of Western Australia 
David.Pannell@uwa.edu.au  
 
Andreas Meyer-Aurich 
Leibniz-Insitute for Agricultural Engineering Potsdam-Bornim  
ameyeraurich@atb-potsdam.de  
 
 
 
 
 
 
 
Poster prepared for presentation at the Agricultural & Applied Economics Association 
2010 
AAEA,CAES, & WAEA Joint Annual Meeting, Denver, Colorado, July 25-27, 2010 
 
 
 
 
 
 
 
Copyright 2010 by Markus Gandorfer, David J. Pannell and Andreas Meyer-Aurich. All 
rights reserved. Readers may make verbatim copies of this document for non-commercial 
purposes by any means, provided that this copyright notice appears on all such copies.  Whole Farm Modeling of the Effect of Risk on Optimal Tillage and Nitrogen 
Fertilizer Intensity  
 
 
Introduction 
Both nitrogen and tillage management have high impacts on the economic and environmental 
performance of agricultural systems and play important roles in the current discussion on 
mitigation of and adaption to climate change. Nitrogen fertilizers are important in terms of 
crop productivity, but they also have a negative impact on ground water quality through 
nitrate leaching and can be a driver of climate change through nitrous oxide emissions. 
Furthermore, the production of mineral nitrogen fertilizers is extremely energy intensive. 
Therefore, efficient use of nitrogen fertilizers is an important element of sustainable crop 
management. Like nitrogen fertilizers, tillage systems also play a significant role in the 
current discussion. Systems of reduced tillage have been proposed to reduce soil erosion, 
increase carbon sequestration in the soil and lead to cost savings from reduced inputs of 
machinery, labor and fuel. However, opportunity costs due to yield penalties of reduced 
tillage systems also must be taken into account. Furthermore, reduced tillage systems may 
require higher plant nutrient supply, which can lower their positive environmental and 
economic benefits. In terms of the risk associated with nitrogen management, available 
literature suggests that nitrogen fertilizer have a risk-increasing effect. So far only few studies 
investigated risk issues associated with different tillage systems. These studies show that the 
effect of risk on optimal tillage management is not as clear as it is for nitrogen management. 
Furthermore, there is little existing literature that analyzes the combined effects of tillage and 
nitrogen management. Therefore, the aim of this paper is to carry out a detailed risk analysis 
of long-term field experiments for various field crops (potato, wheat and corn) where different 
tillage and nitrogen management systems were tested. The results will show risk-reducing 
management practices which can be especially important as an adaption to increased 
production risk through climate change. In addition, the effect of farmers’ risk aversion on the 
optimal decision will be studied. One of the key questions is, what is the extra value to 
farmers when they get recommendations for nitrogen application and tillage systems from 
models which represent risk aversion.  
Material and Methods 
Data for the study come from a long-term (14-year) experiment, established in 1992 at the 
Research Station Scheyern, 40 km north of Munich in southern Germany. Three tillage and 
three fertilizer treatments were arranged in a randomized split-plot design with three 
replications, where tillage treatments were randomly assigned to the main plots, which were 
split randomly by the fertilizer treatments. The investigated tillage systems represent three 
possible tillage intensities under the existing soil and climate conditions. One is conventional 
tillage system with mouldboard plough; the other two are “reduced tillage” and “minimum 
tillage”. Fertilizer treatments were usual practice, with one increased and one reduced level of 
nitrogen fertilizer input. The crop rotation consists of wheat alternated with maize and potato 
so that wheat has been planted after maize and potato, while potato and maize have always 
been planted after wheat.  
To analyze the effect of risk aversion on tillage and nitrogen fertilizer intensity we use an 
expected utility approach. Within this framework the decision maker’s objective is to choose 
the management option which results in the highest expected utility. To facilitate 
interpretation of results we convert the expected utility values to certainty equivalent values. The certainty equivalent is a theoretical money value that can be interpreted as the certain 
money payment that would leave a risk-averse producer indifferent between the payment and 
a risky prospect (crop production, in this case). Farmers are assumed to prefer the 
management system with the highest certainty equivalent. Using this approach we model a 
typical cash crop farm (average farm size: 54 ha; average farm subsidies per year: 22.990 €; 
average wealth per ha: 21.000 €) from the area where the long-term experiment has been 
established. The farm risk model represents yield and price risks. Furthermore, all statistically 
significant crop price correlations and crop price and crop yield correlations are represented in 
the model.  
Results and Conclusions 
From the results we conclude that lower nitrogen intensities have an increasing effect on the 
probability of negative net returns in systems of reduced and minimum tillage (for the whole 
crop rotation). Considering the probability of a negative net return as a risk measure, this 
means that higher nitrogen and tillage intensities are risk-reducing. This conclusion is also 
valid for most of the single crops analyzed. For conventional tillage (plowing) the usual 
fertilizer practice results in the lowest probability of a negative net return (except for wheat 
after corn), whereas reduced and increased nitrogen fertilizer rates (compared to the 
recommended nitrogen rate) have a risk-increasing effect on this benchmark. This means that 
either nitrogen can be considered as a risk-increasing or risk reducing input is depending on 
the existing tillage system.  
Furthermore, we conclude from the results that a farmer’s risk level of aversion should have 
no effect on decision making regarding nitrogen and tillage management, since the ranking in 
terms of certainty equivalent values of analyzed management options does not change with 
increasing risk aversion. Regarding the whole rotation, conventional tillage with usual 
fertilizer practice is the dominant strategy for the whole range of analyzed relative risk 
aversion coefficients from 0 (risk neutrality) to 4 (very risk averse). This is due to the fact that 
the certainty equivalent values of net returns as a function of risk aversions show almost equal 
slopes for the analyzed management options. The consequence is that even for a very risk-
averse farmer, the cost of using a risk-neutral model for decision making is zero. Therefore, 
we conclude that the effort of representing farmers’ risk aversion in this context is not 
worthwhile.  These conclusions are not sensitive to the amount of subsidies farmers receive. 
Even a total cut of decoupled subsidies had no effect on the decision making about nitrogen 
and tillage management neither under risk neutrality nor under risk aversion (as long as 
farmers keep farming within this system).  
 
 
 
 
 
 
 Whole Farm Modeling of the Effect of Risk 
O ti l Till d Nit F tili I t it on Optimal Tillage and Nitrogen Fertilizer Intensity
Markus Gandorfer 
Institute of Agricultural Economics and Farm Management
Technische Universität München Technische Universität München
markus.gandorfer@wzw.tum.de
David J. Pannell 
School of Agricultural and Resource Economics School of Agricultural and Resource Economics, 
University of Western Australia
David.Pannell@uwa.edu.au
Andreas Meyer-Aurich
Leibniz-Insitute for Agricultural Engineering Potsdam-Bornim
ameyeraurich@atb-potsdam.de
Poster prepared for presentation at the Agricultural & Applied Economics Association 2010
AAEA,CAES, & WAEA Joint Annual Meeting, Denver, Colorado, July 25-27, 2010
Copyright 2010 by Markus Gandorfer, David J. Pannell and Andreas Meyer-Aurich. All rights reserved. Readers may make 
verbatim copies of this document for non-commercial purposes by any means, provided that this copyright notice appears on 
all such copies. pWhole Farm Modeling of the Effect of Risk 
on Optimal Tillage and Nitrogen Fertilizer Intensity
Markus Gandorfer*, David J. Pannell and Andreas Meyer-Aurich
RESULTS
, y
*markus.gandorfer@wzw.tum.de
BACKGROUND
From literature we know that in most cases nitrogen 
fertilizers are a risk increasing input  Certainty equivalents of net returns for the 
whole rotation as a function of relative risk 
Cumulative probabilities of net returns for the 
analyzed tillage and nitrogen intensities for the 
⇒ Should we account for farmers’ risk aversion 
when giving nitrogen fertilizer and tillage 
recommendations?
⇒ What is the cost of using a risk neutral model 
in decision making?
07
0,8
0,9
1
b
a
b
i
l
i
t
y
whole rotation as a function of relative risk 
aversion*
analyzed tillage and nitrogen intensities for the 
whole rotation
25
30
35
t
 
(
€
h
a
-
1
)
Conventional Tillage & medium N-rate
Reduced Tillage & high N-rate
Risk Premium
DATA
Data come from a long-term (14-years) experiment 
in southern Germany where three nitrogen and 
0,1
0,2
0,3
0,4
0,5
0,6
0,7
C
u
m
u
l
a
t
i
v
e
 
P
r
o
b
Minimum Tillage & high N-rate
Minimum Tillage & medium N-rate
Minimum Tillage & low N-rate
0
5
10
15
20
C
e
r
t
a
i
n
t
y
 
E
q
u
i
v
a
l
e
n
t
20 €/ha 
No Change 
in Ranking!
in southern Germany where three nitrogen and 
tillage systems (conventional, reduced and 
minimum) were tested. 
Rotation: Wheat-Corn-Wheat-Potato
Tested Nitrogen Fertilizer Rates
Crop low medium high
0
-1000 -500 0 500 1000 1500 2000 2500
Net Return (€ ha-1)
=> lower nitrogen and tillage (not shown in 
the graph) intensities have an increasing 
=> low slope of certainty equivalents as a 
function of risk aversion
* (only the best and second-best options are shown)
0
01234
C
Relative Risk Aversion Coefficient risk 
neutral
highly 
risk avers
CONCLUSIONS OF THIS CASE STUDY
Crop low medium high
-k g  N / h a  -
Wheat 90 135 180
Corn 60 100 135
Potato 50 100 150
the graph) intensities have an increasing 
effect on the probability of negative net 
returns!
function of risk aversion
=> no change in the ranking of management 
options due to increasing risk aversion 
¾ farmers’ risk aversion has no effect on decision making regarding nitrogen and tillage management
¾ a risk avers farmers’ costs of using a risk neutral model for nitrogen and tillage management are 
zero
¾ there is no need for accounting for farmers’ risk aversion when giving nitrogen fertilizer and tillage 
recommendations
Assumptions for the farm risk model (expected 
utility framework):
average farm size:  54 ha 
average farm subsidies: 22.990 €/year 
 lth    h 21 000 €
ACKNOWLEDGMENT
Markus Gandorfer gratefully acknowledge the financial support given by the OECD Co-operative 
Research Programme Fellowship Award  in 2009.
average wealth per ha: 21.000 €
utility function: negative exponential
The farm risk model represents yield and price 
risks and all relevant correlations.

Whole Farm Modeling of the Effect of Risk on Optimal Tillage and Nitrogen Fertilizer Intensity

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics