Risk and Nitrogen Application Levels

Stochastic weather and soil conditions are the suggested reasons why farmers tend to apply more than the recommended levels of nitrogen. This study found that uncertainty plays a role in the application decision of farmers but not in the manner typically assumed. Using a time series of field trials of corn yield to nitrogen for the same site, nitrogen was found to be a risk-increasing input suggesting that uncertainty should decrease, rather than increase, a risk-averse farmer's rate of nitrogen application. Similarly, viewing risk as a profit shortfall, in which fertilizer acts in the role of insurance, was also not supported with the empirical results. Instead, the key role of uncertainty is its impact on expected profits. Increasing application rates leads to lower returns in most years but the increase in profits generated under favorable growing conditions results in greater expected profits with a high application strategy.