Description: Job Market Practice Talk Yue Zhao (Iowa State University)

Location: 368A Heady Hall

Title: Precautionary Motives in Corn Optimal Seeding Rate Decisions

Abstract: This study examines optimal corn seeding rate decisions with intent to understand the relationship between seeding rate, yield risk, and risk aversion. The investigation delves into any precautionary motives driving these optimal seeding rate decisions. Our conceptual model indicates that seed is a marginally risk-reducing input if it decreases yield variability, and marginally risk-increasing if it increases it. Our model also demonstrates that under DARA utility, an increase in the ratio of seed cost to output price reduces optimal seed use when seed is marginally risk-increasing. Conversely, if seed is risk-reducing, the effect is ambiguous. In addition, under DARA utility a higher level of risk aversion and greater yield risks both increase the optimal seeding rate when seed is a marginally risk-reducing input, and decrease it when seed is marginally risk-increasing. Drawing upon agronomic field experiments conducted in Ohio and Illinois from 2012 to 2016 and employing a novel flexible production technology, our empirical analysis and simulations reveal that increasing the seeding rate diminishes production risk when the seeding rate is under a specified threshold and amplifies it when the threshold is exceeded. We find that corn seed is marginally risk-reducing in Ohio and marginally risk-increasing in Illinois given the estimated seed and grain prices during the experimental period. As a result, precautionary motives trigger increased seed use in Ohio and reduced use in Illinois. When the producer exhibits a low level of risk aversion, as defined by us, there is a 0.14% increase in the seeding rate application in Ohio, while in Illinois there's a 0.16% decrease. In contrast, for a producer with a high level of risk aversion, the rates change to a 0.21% increase in Ohio and a 0.33% decrease in Illinois. We also find that implementing crop rotation and no-tillage production practices can aid in reducing yield risks. Our simulations also indicate that yield insurance decreases the optimal seeding rate for both risk-neutral and risk-averse producers in Ohio and Illinois, as a result of moral hazard effects. Finally, we evaluate the environmental impacts associated with changes in seeding rates, induced by precautionary motives and the use of insurance contracts, with a particular focus on their effects on bird biodiversity.