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A Real Options Analysis of Automatic Milking Systems

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  • Engel, Phoebe D.
  • Hyde, Jeffrey

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.

Suggested Citation

  • Engel, Phoebe D. & Hyde, Jeffrey, 2003. "A Real Options Analysis of Automatic Milking Systems," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 32(2), pages 1-13, October.
    • Handle: RePEc:ags:arerjl:31618
    DOI: 10.22004/ag.econ.31618
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    References listed on IDEAS

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    1. 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.
    2. Brian F. Lavoie & Ian M. Sheldon, 2000. "The source of comparative advantage in the biotechnology industry: A real options approach," Agribusiness, John Wiley & Sons, Ltd., vol. 16(1), pages 56-67.
    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).
    4. 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).
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    2. Nemanja Jalić & Črtomir Rozman & Željko Vaško & Karmen Pažek, 2022. "Determining the Extent of Economical Sustainability of a Case Study Milk Farm in Bosnia and Herzegovina Based on the Real Options Model," Sustainability, MDPI, vol. 14(19), pages 1-14, September.
    3. Tauer, Loren W., 2006. "When to Get In and Out of Dairy Farming: A Real Option Analysis," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 35(2), pages 1-9, October.
    4. 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), vol. 2(1), pages 1-18, April.
    5. Feil, Jan-Henning & Musshoff, Oliver, 2013. "Investment, disinvestment and policy impact analysis in the dairy sector: a real options approach," Structural Change in Agriculture/Strukturwandel im Agrarsektor (SiAg) Working Papers 159229, Humboldt University Berlin, Department of Agricultural Economics.
    6. Iwai, Nobuyuki & Emerson, Robert D. & Walters, Lurleen M., 2008. "Labor Cost and Technology Adoption: Real Options Approach for the Case of Sugarcane Mechanization in Florida," 2008 Annual Meeting, February 2-6, 2008, Dallas, Texas 6758, Southern Agricultural Economics Association.
    7. Feil, Jan-Henning & Mußhoff, Oliver, 2016. "Analysing investment and disinvestment decisions under uncertainty, firm heterogeneity and tradable output permits," DARE Discussion Papers 1602, Georg-August University of Göttingen, Department of Agricultural Economics and Rural Development (DARE).
    8. Seyoum, Emayenesh & Karanja, Francis, 2014. "Investment decisions of dairy farmers in south-west Victoria under price and yield uncertainty," 2014 Conference (58th), February 4-7, 2014, Port Macquarie, Australia 183419, Australian Agricultural and Resource Economics Society.
    9. Tubetov, Dulat & Musshoff, Oliver & Kellner, Ulla, 2012. "Investments in Kazakhstani Dairy Farming: A Comparison of Classical Investment Theory and the Real Options Approach," Quarterly Journal of International Agriculture, Humboldt-Universitaat zu Berlin, vol. 51(3), pages 1-28, August.
    10. Feil, Jan-Henning & Mußhoff, Oliver, 2016. "Investment And Disinvestment Under Uncertainty, Firm Heterogeneity And Tradable Output Permits," 56th Annual Conference, Bonn, Germany, September 28-30, 2016 244756, German Association of Agricultural Economists (GEWISOLA).
    11. Lotte Yanore & Jaap Sok & Alfons Oude Lansink, 2023. "Anticipate, wait or don't invest? The strategic net present value approach to study expansion decisions under policy uncertainty," Agribusiness, John Wiley & Sons, Ltd., vol. 39(2), pages 535-548, March.

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    Livestock Production/Industries;

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