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Prices and the Global Economy

How should I decide which crop(s) to plant and what other inputs (fertiliser, pesticide) to use?

I assume that most farmers will aim to plant the crop or crops that results in the highest profit. This decision should take into account the total cost of all inputs, including seed, fertiliser, pesticide, water and even the cost of any nutrient loss (which will impact on the cost of future fertiliser). The farmer should also take into account the likely price at which he will be able to sell the crop.

Most of the individual costs will usually be quite easy to calculate if the market for inputs is open and transparent. I recommend using a 'spreadsheet' listing the various inputs down the sheet with the possible crops shown across columns. Calculate the total costs for each crop. Then calculate the profit for each crop, using different assumptions about the price at which you will sell the crop. I have worked through an example below for different (hypothetical) types of wheat.

(27 Kb GIF)

As you can see, the profitability of each option depends on many factors – especially the final price. Indeed, the price of wheat determines whether the farmer makes a profit or a loss. Moreover, the higher yielding the crop type, the bigger the difference between the loss at $180/tonne and the profit at $200/tonne. So, the farmers’ expectation regarding the likely price of the wheat at market will play a significant role in determining the mix of crop.

One way to help make a decision is to assign probabilities to the likelihood that the crop will go for specific amounts, multiply the expected price by the probability in each case and then  add these together. This makes more sense when you see it in practice. So, if you think there is a 50% chance that the price will b e $180 and a 50% chance the price will be $200, the “expected” price is 0.5 X $180 + 0.5 X $200 = $190.

If, on the other hand, you think there is an 60% chance that the price will be $180 and only a 40% chance that the price will be $200, then that gives you an “expected” price of (0.6 X $180) + (0.4 X $200) = $188. Meanwhile, if you think there is a 40% chance that the price will be $180 and a 60% chance that it will be $200, then the “expected” price is $192.

Below, I have recalculated the profitability of planting different crops based on these “expected” prices. As you can see, it makes sense to plant the most expensive insect and drought tolerant dwarf wheat only if the expected price is  $192/tonne or above. Below $192, it makes more sense to plant only the conventional wheat.

Table showing profit at different levels of expected price (11Kb GIF)