[MUSIC PLAYING] So we're into week 3. And this week, we're going to talk about the economics of agricultural inputs. Through the week, we'll cover a range of issues that relate to this topic, including the level of usage and the process of agricultural inputs, the effect of agriculture inputs on yields, the optimal input rates from an economic perspective. I'll give a demonstration of building a spreadsheet to help find the optimal rate of an agricultural input. We'll look at the effect of changing prices and changing yields on the optimal level of an agricultural input. I'll look at, what if we allow for the fact that an input may cause pollution problems off the farm? How should that influence our choice of input levels? And then, finally, I'll talk about the idea of a flat payoff function, which you'll hear about towards the end of the week. So let's start by talking about fertilizers. So fertilizers are as old as farming itself. And in ancient times, farmers used a whole variety of different types of more natural fertilizers, manure, guano, ashes, vegetable waste, and so on. These days, agriculture relies prominently on synthetic fertilizers, which the first of these were invented about 200 years ago. And there's a whole variety of these, including ones you've probably heard of like superphosphate. In Australia, these are some statistics for 2012-13. So in that year, 76,000 farm businesses reported using fertilizer to some degree. And 58 million hectares of agricultural land had fertilizer applied to it. So it's a huge proportion of particularly the more intensive end of agriculture or uses of fertilizers. They used 6 and 1/2 million tons of fertilizer. And the most applied fertilizer amongst the artificial fertilizers was urea with 1.1 million tons. But there's also quite high usage of animal manure, not in the extensive agriculture such as what is behind me, but in smaller-scaled agricultural systems. So fertilizer is one of the largest input costs on most farms. This graph shows the trend of increasing fertilizer use over time, particularly a big increase in the use of nitrogen fertilizers, a smaller increase in phosphorus, and not much of an increase in potassium. But the increase in nitrogen has been really marked and has made a big difference in many parts. This is global fertilizer use. We've seen this graph before, where global fertilizer use increased very substantially from about 1950 up until 20 years ago or so and has been reasonably stable since then, a little bit volatile. This graph shows the price of one of the fertilizer inputs, which is rock phosphate. Rock phosphate is sometimes used as a fertilizer in its own right, but usually it's an input to fertilizer manufacturer. And you can see that in the last few years, since about 2006, the price of rock phosphate has been very volatile. Particularly in 2007, 2008, there was a real spike in the price, had a big influence on farmer's usage of inputs at about that time. Prior to that time, the price of rock phosphate was remarkably stable for quite a long time. So it's really only the last five, six, seven years that we've seen this marked volatility in the price of fertilizers. So in summary, fertilizers provide nutrients to increase crop yields. Global fertilizer use has increased steadily since about 1950. And global fertilizer prices have fluctuated markedly since about 2006. [MUSIC PLAYING]