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Renewable Accounts: The Price of Everything

Understanding the concept of opportunity cost will be important to farmers in the coming years.

By David Ripplinger, Bioproducts and Bioenergy Economist and Assistant Professor

NDSU Department of Agribusiness and Applied Economics

One of the fundamental concepts of economics is opportunity cost. The opportunity cost of a choice is the forgone benefit of the next best alternative.

A common agricultural example arises when a landowner decides to farm or rent his or her cropland. If the land is farmed, rent no longer can be charged. That forgone rent is the opportunity cost of farming the land.

Estimating the opportunity cost of a choice can be challenging. You have to identify major considerations and then value them. Many choices have nonfinancial dimensions that can be easy to miss and then misvalued once identified.

While the concept of opportunity cost can be used for many decisions, I bring it up to help prepare farmers in the northern Plains to be ready for a situation that may be on the horizon.

Two years from now, after an informational meeting at your local community center, a businessman offers you $50 per ton of wheat straw that he will have baled after you’ve harvested the grain. Do you accept the offer?

The answer should depend on the opportunity cost of the straw.

While the straw could be removed and used as bedding, most farmers today value the straw most highly when it stays in the field. There nutrients and organic matter remain, moisture is enhanced and erosion control is provided. Are these and other benefits from leaving the straw in the field worth $50 per ton or more? Again, what is the opportunity cost of the straw?

We could walk through an exercise that maps the composition of straw and current fertilizer prices to estimate the nutrient value, and estimate less precise values for improved soil moisture and erosion control, the values of which may be subjective based on how you value these benefits.

I will be delivering Extension programming during the next month to help farmers understand opportunity cost and how they can calculate the value of their residue. These face-to-face meetings across the state will make sure they are ready to confidently sign or decline an offer for their residue if and when it is made.


NDSU Agriculture Communication - Jan. 17, 2016

Source:David Ripplinger, (701) 231-5265, david.ripplinger@ndsu.edu
Editor:Kelli Armbruster, (701) 231-6136, kelli.armbruster@ndsu.edu
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