Incorporating multiple sources of risk into the determination of optimal fertilization rates


Talpaz, H.; Taylor, C.R.

Proceedings of AAEA Meeting July/August 1977, Contributed Papers: 1110

1977


A theoretical framework for incorporating three sources of risk - weather, price and production response - is presented. The decision criterion considered is the maximization of profit subject to risk constraint, where risk is defined as the probability of not recovering cost of fertilization. A two-source risk numerical application is provided.

1110
December
1977
Amer.
J.
Agr.
Econ.
"Land
Appreciation
Rates
and
Economic
Justifica-
tion
of
Land
Values."
Glenn
A.
Hehners
and
Myles
J.
Watts
(University
of
Nebraska)
A
capital
budgeting
model
is
applied
to
land
in-
vestments.
Yearly
net
incomes
from
land
are
as-
sumed
to
be
less
than
opportunity
costs
yielding
negative
yearly
net
economic
flows.
Land
apprecia-
tion
rates
necessary
to
economically
justify
the
in-
vestment
are
determined
on
a
before
and
after-tax
basis.
Decision
Making
Under
Risk
(A.
Gene
Nelson,
Ore-
gon
State
University,
Chairman)
"Teaching
Decision
Making
Under
Risk
and
Uncer-
tainty
to
Farmers."
John
Holt
(University
of
Florida)
and
Kim
B.
Anderson
(Oklahoma
State
University)
A
manager's
central
role
is
making
choices
among
uncertain
outcomes.
A
teaching
approach
is
re-
ported
that
can
help
managers
analyze
the
compo-
nent
parts
of
a
decision,
clarify
the
risk
involved
in
each
action,
and
help
to
analyze
that
risk
in
a
sys-
tematic
manner.
The
analysis—whether
or
not
to
graze
stocker
cattle
on
wheat—embodies
produc-
tion
and
marketing
risk
for
both
cattle
and
wheat.
"A
Direct
Solution
Alternative
to
E-V
Analysis
in
Utility
Maximization
Models."
Edward
E.
Ives
(Governor's
Energy
Advisory
Council,
Texas)
Utility
maximization
models
of
farm
cropping
deci-
sions
typically
use
E-V
analysis
as
a
solution
tech-
nique,
requiring
the
solution
to
a
number
of
qua-
dratic
programming
problems.
The
problem
can
be
solved
using
a
single
quadratic
programming
prob-
lem.
The
direct
solutions
advantages
may
some-
times
be
outweighed
by
other
factors,
however.
"Incorporating
Multiple
Sources
of
Risk
into
the
Determination
of
Optimal
Fertilization
Rates."
Hovav
Talpaz
and
C.
Robert
Taylor (Texas
A&M
University)
A
theoretical
framework
for
incorporating
three
sources
of
risk—weather,
price,
and
production
response—is
presented.
The
decision
criteria
con-
sidered
are
the
maximization
of
profit
subject
to
risk
constraint,
where
risk
is
defined
as
the
proba-
bility
of
not
recovering
cost
of
fertilization.
A
two-
source
risk
numerical
application
is
provided.
"A
Bio-Economic
Model
of
Beef,
Forage,
and
Grain
Production
for
Western
Canada."
Bernard
H.
Sonntag
and
Kurt
K.
Klein
(Agriculture
Canada)
Multidisciplinary
research
can
provide
a
better
un-
derstanding
of
agricultural
production
problems.
A
bioeconomic
model
of
beef,
forage,
and
grain
pro-
duction
is
described
in
terms
of
its
biological
and
economic
components.
Special
applicabilities
for
this
type
of
model
are
noted.
"Expected
Return
and
Risk—A
Trade-Off
in
Farm
Enterprise
Choice."
Bryan
W.
Schurle
and
Bernard
L.
Erven
(Ohio
State
University)
A
modified
linear
programming
alternative,
Haz-
ell's
MOTAD
model,
is
used
to
address
an
en-
terprise
choice
problem
in
which
the
enterprise
al-
ternatives
differ
substantially
in
average
net
return
and
risk.
Examination
of
several
specific
questions
related
to
the
trade-offs
between
return
and
risk
demonstrate
the
model's
usefulness.
"Procedures
for
Estimating
Exponential
Utility
Functions."
Steven
T.
Buccola
(Virginia
Polytechnic
Institute
and
State
University)
Exponential
utility
functions
have
the
desirable
fea-
ture
of
constant
absolute
risk
aversion
but
present
estimation
problems.
Logarithmic
transformations
of
these
functions
do
not
conform
to
Von
Neumann-Morgenstern
axioms
and
hence
cannot
be
used
as
bases
for
a
best
fit.
A
proper
criterion
for
selecting
such
a
fit
is
described.