BS in Agricultural Business
The purpose of this study was to determine if a fertilizer lab would be a cost beneficial way of reducing nitrogen costs and consumption for a medium-sized produce farm (The Farm) in Santa Barbara County, California. A cost benefit analysis was performed to determine if the lab, installed in 2011, would provide a net positive benefit. The analysis compares the costs of the lab to the benefits of the lab. The costs of the lab are the annualized initial investment costs (based on costs incurred in 2011), the operating costs, and the opportunity costs of the lab. The benefit of the lab was measured by the decrease in fertilizer costs assuming constant yields. If the benefits less the costs are positive and the use of nitrogen, potassium and phosphorus are decreased for The Farm, then the lab would be a cost beneficial way to decrease nutrient costs and usage for The Farm. A sensitivity analysis was also performed to determine how sensitive the results of this study were to the assumption of unchanged yields for The Farm.
The analysis suggests that the benefits of the lab greatly outweigh its costs when no change in yields is assumed. This occurs because fertilizer use was reduced significantly with no change in production yield (based on information provided by farm managers). Annual lab costs in 2011 ($58,825) were only about one-tenth of the amount of the cost savings from reduced fertilizer use ($535,222). Thus, under the assumption of unchanged yields, the lab appears to be a highly cost beneficial way for The Farm to reduce its nitrogen costs and consumption.
However, the sensitivity analysis indicates that the results depend markedly on assumed yields. If yields were to decrease by more than 1.8% in 2011 due to reductions in fertilizer application attributed to the information provided by the lab, then the costs would outweigh the benefits. This suggests that if the manager’s perception about yields being unchanged is even mildly inaccurate, the basic conclusion of this study is altered. Future studies of this investment can therefore provide more accurate results if they are based on data about actual production yields. Similarly, the findings for this one medium-scale produce farm may not be applicable to other farms with different production patterns or cost structures.