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A Real Options Analysis of Automatic Milking Systems

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  • Engel, Phoebe D.
  • Hyde, Jeffrey
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    Abstract

    Automatic, or robotic, milking systems have the potential to significantly change the way milk is produced on U.S. dairy farms. However, there is a high degree of uncertainty associated with adoption of this new technology. A real options approach is used to analyze the decision to replace an operational milking system with an automatic milking system. The most important source of uncertainty is shown to be the length of the technology's useful life. Under our assumptions, the automatic system is always an optimal investment if it is certain that it will last longer than the operational system being replaced.

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    Bibliographic Info

    Article provided by Northeastern Agricultural and Resource Economics Association in its journal Agricultural and Resource Economics Review.

    Volume (Year): 32 (2003)
    Issue (Month): 2 (October)
    Pages:

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    Handle: RePEc:ags:arerjl:31618

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    Related research

    Keywords: Livestock Production/Industries;

    References

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    1. Sporleder, Thomas L. & Bailey, Michael D., 2001. "Using Real Options To Evaluate Producer Investment In New Generation Cooperatives," 2001 Annual meeting, August 5-8, Chicago, IL 20725, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    2. Isik, Murat & Coble, Keith H. & Hudson, Darren & House, Lisa O., 2003. "A model of entry-exit decisions and capacity choice under demand uncertainty," Agricultural Economics, Blackwell, vol. 28(3), pages 215-224, May.
    3. Balmann, Alfons & Musshoff, Oliver, 2002. "Is The "Standard Real Options Approach" Appropriate For Investment Decisions In Hog Production?," 2002 Annual meeting, July 28-31, Long Beach, CA 19897, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
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    Cited by:
    1. Floridi, Matteo & Bartolini, Fabio & Peerlings, Jack & Polman, Nico & Viaggi, Davide, 2013. "Modelling the adoption of automatic milking systems in Noord-Holland," Bio-based and Applied Economics Journal, Italian Association of Agricultural and Applied Economics (AIEAA), issue 1, April.
    2. Tauer, Loren W., 2004. "When to Get In and Out of Dairy Farming: A Real Option Analysis," Working Papers 127151, Cornell University, Department of Applied Economics and Management.
    3. Tubetov, Dulat & Musshoff, Oliver & Kellner, Ulla, 0. "Investments in Kazakhstani Dairy Farming: A Comparison of Classical Investment Theory and the Real Options Approach," Quarterly Journal of International Agriculture, Humboldt-Universit├Ąt zu Berlin, vol. 51.
    4. Sameh Hachicha & Leila Kaaniche & Fathi Abid, 2011. "Sequential investment and delay: an agribusiness firm case study," Agricultural Finance Review, Emerald Group Publishing, vol. 71(2), pages 240-258, July.

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