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Risk analysis useful in determining investment in subsoil manuring

Crop yield responses for the economic framework were determined from over 15 years of trials using chicken litter as the subsoil manure. Pictured is a machine known as the Peries-Weightman subsoiler.
Photo: GRDC

Crop yield benefits and longevity are key factors in the economics of subsoil manuring.

Key points

  • Returns, risks and longevity of treatment need to be taken into account when determining the benefit of investing in subsoil manuring
  • A framework has been developed to analyse the economics of subsoil manuring, which will be informed by data from field trials

To date, no studies have accounted for the yield or price risks when assessing the profitability of a subsoil manuring investment within a cropping system.

Accordingly, as part of a southern region GRDC investment led by Professor Roger Armstrong from Agriculture Victoria, a master's project was included to analyse the economics of ameliorating soil constraints using subsoil manuring.

The key economic question for a grain grower is whether the income from extra grain produced exceeds the extra costs to justify the upfront investment in amelioration. - University of Melbourne masters student Sam Henty

Previous studies estimated subsoil manuring could cost as much as $1200 per hectare if a grower has to transport the organic material a considerable distance.

"While addressing subsoil constraints is likely to increase grain yield, the key economic question for a grower is whether the income from extra grain produced covers the extra costs of ameliorating the subsoil," University of Melbourne master's student Sam Henty says.

Approach

All investments should be assessed in terms of likely costs, returns and risk. Key risks include seasonal conditions, yield potential and grain prices, which can vary enormously.

"In this analysis, the extra returns are the additional farm profit from extra yields resulting from subsoil manuring. Risk analysis was used to assess the effect of the variability of commodity prices and yields on the mean and variance of the return on capital from a subsoil manuring investment over a five-year period," Mr Henty says.

The minimal change to the gross margin as a result of subsoil manuring was assessed using partial discounted cashflow budgets over the five-year investment period.

"A six per cent (real) rate was used to discount the future benefits and costs to present values of the alternative investments. The key measures of profitability and economic performance used were net present value, return on capital, and benefit-cost ratio," Mr Henty says.

Risk analysis was carried out using the modelling program @Risk, which allows uncertain variables to be defined by probability distributions. The variability of grain price and subsoil manuring yield response was accounted for. This method of incorporating the probabilities into the budget makes for a better-informed investor.

The sensitivity to changes in the magnitude and frequency of yield response, and reduced fertiliser costs, were examined using three scenarios.

Scenario 1 - Yield response data from numerous subsoil manuring field trials published over 15 years from the Victorian high-rainfall zone were used to develop probability distributions to estimate the future subsoil manuring yield response. All experiments used a continual band of chicken litter, applied at 20t/ha, applied in the first year of each of the trials and not applied again. A reduced annual fertiliser cost was assumed to apply in each of the first three years of the investment.

Scenario 2 - Yield response assumptions were the same as scenario one and there were zero benefits from reduced fertiliser costs.

Scenario 3 - Experimental yield response and the reduced fertiliser cost was decreased by 50 per cent.

The expectations of extra yield from crops grown on subsoil manuring treated land over several years needs to be considered in the context of the grower's risk appetite. - University of Melbourne masters student Sam Henty

Figure 1 shows all possible return-on-capital outcomes for the three different scenarios and the probability that each return-on-capital outcome will occur. This graph estimates the likelihood of achieving a rate of return. For example, 0.5 cumulative probability represents a 50 per cent chance of earning more than the respective return on capital for each scenario (green line).

"Considering risk, using subsoil manuring in a cropping system in all scenarios tested were, on average, more profitable than an alternative investment earning six per cent per year," Mr Henty says.

"For scenario one, there is 90 per cent chance that over a five-year life, an investment in subsoil manuring would earn higher than 12 per cent return (pink line)."

FIGURE 1 All possible return-on-capital outcomes for each five-year scenario and the probability that each return-on-capital outcome, or one with a lower value, will occur. SOURCE University of Melbourne

Figure 1: All possible return-on-capital outcomes for each five-year scenario and the probability that each return-on-capital outcome, or one with a lower value, will occur.
Source: University of Melbourne

Implications for growers

"The size of the expected extra yield benefits and longevity of these benefits are the most important factors for a grower to consider when assessing the likely merit (return and risk) of investing in subsoil manuring in their own situations," Mr Henty says.

The expectations of the extra yield from crops grown on treated land need to be considered in the context of the grower's risk appetite. A risk-averse grower will be less comfortable adopting subsoil manuring if the yield response is less than what has been achieved in experiments.

This economic work is ongoing in the project led by Professor Armstrong. As more yield response data (magnitude, frequency and longevity) is measured in field trials, and less costly treatments are developed, these will be used to run further economic assessments. The longevity of the yield responses and the need to reapply amelioration practices are key factors.

GRDC Research Code DAV00149

More information: Sam Henty, Agriculture Victoria, sam.henty@agriculture.vic.gov.au, 0430 482 443

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