Optimal Dynamic Management of Agricultural Land-Uses: An Application of Regime Switching

By Doole, Graeme J.; Hertzler, Greg L. | Journal of Agricultural and Applied Economics, February 2011 | Go to article overview

Optimal Dynamic Management of Agricultural Land-Uses: An Application of Regime Switching


Doole, Graeme J., Hertzler, Greg L., Journal of Agricultural and Applied Economics


The capacity of global agricultural production to meet increased demand for food from population growth and wealth accumulation is threatened by extensive land degradation. Nonetheless, previous research has focused primarily on the dynamic implications of input management and ignored land-use choice. This paper extends this theory through an examination of the intertemporal management of agricultural land through the use of non-crop inputs, such as fertilizer, and land uses that either degrade or restore productivity. The need to consider the relative total asset value of alternative crops over time is demonstrated. Moreover, higher output prices for degrading crops are shown to increase their relative value, motivating the later adoption of substitutes. An inability of land markets to reflect differences in resource quality and low capital malleability promote greater degradation. However, substitution of complementary effects through input use may help to sustain productivity. These factors are discussed in the context of crop sequence management in Western Australian cropping systems.

Key Words: crop sequences, land degradation, regime switching

JEL Classifications: Q15, Q24

Global agricultural production must increase by around 40 per cent over the next 20 years if increased demand due to population growth and wealth accumulation is to be satisfied (Organization for Economic Co-operation and Development and the Food and Agriculture Organization of the UN (OECD-FAO), 2009). However, this is seriously constrained by extensive land degradation, particularly in developing countries, that directly decreases primary productivity (Bruinsma, 2009). An improved understanding of the efficient management of landuse sequences can help to offset these constraints, as rotation with crops and pastures that have a beneficial impact on the inherent productivity of a soil has been used for centuries to sustain or increase the yields of agricultural plants (Doole and Pannell, 2009).

The beneficial impacts of land-use sequences can be classified as either direct or indirect. Direct benefits are the lowering of risk and the smoothing of input demand. Indirect benefits are those that influence profit by increasing the production of subsequent crops (Hennessy, 2006). Examples are the interruption of pest and disease cycles, the reduction of soil erosion, nitrogen fixation by legumes, enhanced soil structure, management of crop residues, and weed management (Doole and Pannell, 2009). Aggregation of indirect benefits provides an indication of the productivity of the land resource; this is analogous to a form of capital stock that partly determines crop production.

McConnell (1983) formalized the relationship between capital theory and the base productivity of agricultural land. In this model, conservation reduced current production and degradation could not be offset through the addition of non-soil inputs, such as fertilizer (Barrett, 1991; McConnell, 1983). Barbier (1990) extended this framework to incorporate "productive" and "ameliorative" inputs. The first increased both output and soil loss, for example deep cultivation. The second decreased erosion but did not affect crop production directly, for example the construction of terraces. Determining the optimal usage of the former is similar to renewable resource exploitation, while the latter resembles traditional investment theory (Clarke, 1992; LaFrance, 1992). Links to capital theory are even stronger when ameliorative practices enter as stock variables and investment therefore has a lasting impact on conservation (Grepperud, 1997).

The single crop approach adopted in these papers disregards complementary effects between agricultural practices. However, these can often be important in reality (Orazem and Miranowski, 1994). Indirect effects may be incorporated by identifying the optimal allocation of a given area of land among crop and non-crop land uses, such as pasture, at each point in time (Goetz, 1997).

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