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Irreversible Investment Decisions In Perennial Crops With Yield And Price Uncertainty

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  • Price, T. Jeffrey
  • Wetzstein, Michael E.
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    Abstract

    Optimal entry and exit thresholds for Georgia commercial peach production are calculated when both price and yield follow a Brownian motion process. The thresholds are based on an irreversible sunk-cost investment model, where revenue from peach production is affected by the timing of when to enter production. Results indicate stability in Georgia peach production, with growers who are currently producing peaches remaining in production and potential peach growers delaying investment unless they have the ability of earning enhanced returns.

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    File URL: http://purl.umn.edu/30874
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    Bibliographic Info

    Article provided by Western Agricultural Economics Association in its journal Journal of Agricultural and Resource Economics.

    Volume (Year): 24 (1999)
    Issue (Month): 01 (July)
    Pages:

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    Handle: RePEc:ags:jlaare:30874

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    Web page: http://waeaonline.org/
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    Related research

    Keywords: Crop Production/Industries;

    References

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    1. T. Jeffrey Price & Michael E. Wetzstein & Mark W. Rieger, 1997. "Reducing Yield Variation in Peach Orchards by Geographic Scattering," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(4), pages 1119-1126.
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    Citations

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    Cited by:
    1. Ihli, Hanna Julia & Maart, Syster Christin & Musshoff, Oliver, 2012. "Investment and Disinvestment in Irrigation Technology – An Experimental Analysis of Farmers’ Decision Behavior –," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124532, Agricultural and Applied Economics Association.
    2. Isik, Murat & Khanna, Madhu & Winter-Nelson, Alex, 2001. "Sequential Investment In Site-Specific Crop Management Under Output Price Uncertainty," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 26(01), July.
    3. Duku-Kaakyire, Armstrong & Nanang, David M., 2004. "Application of real options theory to forestry investment analysis," Forest Policy and Economics, Elsevier, vol. 6(6), pages 539-552, October.
    4. Boyer, Christopher N. & Larson, James A. & Roberts, Roland K. & McClure, Angela T. & Tyler, Donald D., 2014. "The impact of field size and energy cost on the profitability of supplemental corn irrigation," Agricultural Systems, Elsevier, vol. 127(C), pages 61-69.
    5. Seyoum, Emayenesh & Chan, Chris, 2012. "A real-options analysis of wine grape farming in north west Victoria," 2012 Conference (56th), February 7-10, 2012, Freemantle, Australia 124446, Australian Agricultural and Resource Economics Society.
    6. I. Tzouramani & K. Mattas, 2004. "Employing real options methodology in agricultural investments: the case of greenhouse construction," Applied Economics Letters, Taylor & Francis Journals, vol. 11(6), pages 355-359.
    7. Finger, Robert, 2012. "How strong is the “natural hedge”? The effects of crop acreage and aggregation levels," 123rd Seminar, February 23-24, 2012, Dublin, Ireland 122538, European Association of Agricultural Economists.
    8. Kopke, Emma & Young, John & Kingwell, Ross, 2008. "The relative profitability and environmental impacts of different sheep systems in a Mediterranean environment," Agricultural Systems, Elsevier, vol. 96(1-3), pages 85-94, March.
    9. Mitchell, Paul D. & Rejesus, Roderick M. & Coble, Keith H. & Knight, Thomas O., 2010. "A Real Options Framework for Analyzing Program Participation as Human Capital Investments: The Case of the Average Crop Revenue Election (ACRE) Program," Staff Paper Series 547, University of Wisconsin, Agricultural and Applied Economics.
    10. Calum G. Turvey, 2010. "Biography: Kiyosi Itô and his influence on the study of agricultural finance and economics," Agricultural Finance Review, Emerald Group Publishing, vol. 70(1), pages 5-20, May.
    11. Lavee, Doron, 2010. "The effect of water supply uncertainty on farmers' choice of crop portfolio," Agricultural Water Management, Elsevier, vol. 97(11), pages 1847-1854, November.
    12. Tzouramani, Irene & Mattas, Konstadinos, 2002. "Employing Real Options Methodology for Decision Making in Greenhouse Technology," 2002 International Congress, August 28-31, 2002, Zaragoza, Spain 24835, European Association of Agricultural Economists.
    13. Isik, Murat, 2001. "Technology Adoption Decisions Under Uncertainty: Impacts Of Alternative Return Assumptions On Timing Of Adoption," 2001 Annual meeting, August 5-8, Chicago, IL 20658, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    14. Lambarraa, Fatima & Stefanou, Spiro E. & Gil, Jose Maria, 2009. "The analysis of irreversibility, uncertainty and dynamic technical inefficiency on the investment decision in Spanish olive sector," 2009 Conference, August 16-22, 2009, Beijing, China 51397, International Association of Agricultural Economists.
    15. Seo, Sangtaek & Segarra, Eduardo & Mitchell, Paul D. & Leatham, David J., 2006. "Irrigation Technology Adoption in the Texas High Plains: A Real Options Approach," 2006 Annual meeting, July 23-26, Long Beach, CA 21427, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    16. Murat Isik, 2006. "Implications of alternative stochastic processes for investment in agricultural technologies," Applied Economics Letters, Taylor & Francis Journals, vol. 13(1), pages 21-27.
    17. Isik, Murat & Khanna, Madhu & Winter-Nelson, Alex, 2000. "Sequential Investment In Site-Specific Crop Management Under Output Price Uncertainty: Implications For Nitrogen Pollution Control," 2000 Annual meeting, July 30-August 2, Tampa, FL 21875, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    18. Ihli, Hanna Julia & Chiputwa, Brian & Musshoff, Oliver, 2013. "Do Changing Probabilities or Payoffs in Lottery-Choice Experiments Matter? Evidence from Rural Uganda," Discussion Papers 158146, Georg-August-Universitaet Goettingen, GlobalFood, Department of Agricultural Economics and Rural Development.

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