Risk and Maximum Residue Limits: A Study of Hops Production

This paper examines how maximum residue limits (MRLs) affect the optimal choice by growers of chemical applications to control pests and diseases. In practice, growers who export balance both yield risk and pesticide residue uncertainty when making chemical application decisions. To address these issues we specify an expected utility model and calibrate it to data collected from a 2012 survey of hop growers in the Pacific Northwest. Then we simulate hop grower/exporter decisions subject to MRLs across a myriad of scenarios. As anticipated, risk preferences contribute to explaining higher chemical use. All else equal, more stringent MRLs tend to induce risk averse growers to apply fewer chemicals than do risk neutral growers because of the increasing likelihood of crop rejection due to exceeding an MRL. Under specific circumstances risk preferences coupled with underlying MRLs have the potential to tip the decision towards less chemical uses with potential for more growers implementing integrated pest management strategies or, alternatively, greater use of other pesticides not subject to MRL restrictions.