Input Risk in Canadian Prairie Agriculture

• Author / Creator

  Brown, Bijon

• It is often assumed that agricultural producers are price takers; that is, prices are beyond their control or influence. While farmers have been able to manage fluctuations in prices received for output, there is also considerable value in managing input risk. Nevertheless, there are few studies that focus on the value of input risk management. The two studies herein focus on two different forms of input risk and how the efficient management of such risks can create value for Albertan farmers.
  The first study looks at the value of investing in a technology, near infrared reflectance spectroscopy (NIRS), that would reduce input quality risk. NIRS is a non-destructive technology which allows for the determination of the nutrient content in organic feedstuff. Additionally, it allows for a potential reduction in uncertainty in nutrient content resulting in adjustments in optimal rations leading to changes in feed costs.
  A joint least-cost ration model (LCRM) and simulation framework is used to undertake a net present value (NPV) analysis of NIRS technology adoption by Alberta hog producers. The uncertainty model (No-NIRS scenario) is a chance constrained LCRM in which nutrients of three feedstuffs are considered to be variable. In contrast, the certainty model (NIRS adoption scenario) assumes that with NIRS the protein content of ingredients is known and the LCRM is solved. In this model, 1000 protein values are drawn from a normal distribution to simulate variable protein content in the feedstuffs. The certainty LCRM is then optimized and the total feed cost is obtained for each protein content level. The change in feed cost is obtained by comparing the costs under both models, and then aggregated to the farm-level. Net benefits are discounted and compared to the cost of procurement to assess investment feasibility.
  Findings indicate median savings of more than $5 per hog can be attributed to NIRS technology. For an Alberta herd size of 1630 head of hogs, this translates to savings of almost $7,300 per year and for a large farm, savings could be approximately $56,000 per year. NIRS investment could generate as much as $700,000 in NPV benefits for a large-scale farm. Hence, there is evidence to suggest that investment in NIRS technology can be economically feasible for both larger and smaller sized farms.
  
  The second study investigates the impact of diversion externalities (i.e., the inability of an agent to divert entitled allocations due to diversions made by upstream agents or agents with licences that have a higher priority) and water market price and volume risk on water market participation and farmer profitability under alternative water allocation regimes.
  
  An agent-based model (ABM) is used to model irrigation activity around the Oldman River in southern Alberta. The model captures the complexity of multiple agents diverting water from a river according to the water allocation system, soil moisture requirements for optimal crop growth as well as river flows available for diversion. The model also simulates an endogenous water rights market from which equilibrium prices and volumes are obtained and subsequently analysed.
  Simulation results indicate that if there is adequate water supply a FITFIR regime is most beneficial to crop farmers, and farmers find it economically viable not to trade. If there is inadequate water supply, however, a water sharing regime is best. For both adequate and inadequate supply scenarios, a FITFIR regime with trading is most beneficial for livestock farmers. If the objective is to have stable markets in terms of relatively low price and volume volatility, then the water sharing regime would be best whether there is adequate or inadequate water supply. There is evidence of diversion externalities and these externalities are exacerbated by a FITFIR regime. In most situations, there is evidence that water market price volatility negatively impacts crop farmer participation in the water market. Finally, there is evidence that price volatility negatively affects crop farm profitability, but volatile water prices are not significant enough to fully erode gains from trade in efficient water markets.

• Subjects / Keywords

  • Chance constrained programming
  • Irrigation in Alberta
  • Input risk
  • Capital budgeting
  • Water market
  • Near-Infrared Spectroscopy (NIRS)
  • Least-cost ration models
  • Water rights trading
  • Agent-based simulation models

• Graduation date

  Fall 2018

• Type of Item

  Thesis

• Degree

  Doctor of Philosophy

• DOI

  https://doi.org/10.7939/R3DR2PR3H

• License

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