Farmers’ spending on variable inputs tends to maximise crop yields, not profit

We estimate the marginal returns to spending on Crop Variable Inputs (CVI) (such as fertilizers and crop protection), to explore whether observed spending maximises physical or economic returns to farmers. Data are taken from the Farm Business Survey for 2004-2013, where gross margins and input spending are available, in over 10,300 crops of conventional winter wheat or oilseed rape in England and Wales. Marginal spending on CVIs generate financial returns significantly less than d1 per marginal pound spent. This suggests that expenditure on CVIs exceeds an economic optimum that would maximise profit. However marginal physical products (crop yields) are positive, but small and significantly different from zero. This suggests that, on average, farmers approximately maximise yields. These results hold across a wide range of alternative economic models and two crop species. Similar results have been reported in estimations for Indian grain production and for maize in China. In practice, farmers are making decisions on input use in advance of having information on a variety of factors, including future yield, product quality and price, making it difficult to optimise input levels according to expected profit. Farmers may be consistently optimistic, prefer to avoid risk, or deliberately seek to maximise yields. Some farmers may put on the standard recommended application irrespective of input or expected output price. It is also possible that advice may sometimes aim to maximise yield, influenced by an incentive to encourage greater sales. Excessive input use both reduces private profits and is a cause of environmental damage. There are thus potential private as well as social benefits to be gained from optimising levels of input use.