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Uncertainty and investment in precision agriculture - Is it worth the money?

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  • Tozer, Peter R.

Abstract

Irreversibility and uncertainty render the standard capital budgeting techniques such as net present value (NPV) analysis insufficient as a decision criterion. The standard NPV underestimates the value of the investment by not including the value of waiting for new information to reduce the uncertainty of the cashflows generated by the investment. An alternative to NPV analysis is real options. In this study, we apply real options analysis to an investment decision for a grain producer in Western Australia. The investment choice is to either purchase machinery suitable for undertaking controlled traffic precision agriculture or acquire a conventional system and reduce sowing time. The results of the analysis suggest that the required rates of return for the two investment alternatives need to be approximately 96-156% higher than the rates of return used in the standard NPV analysis. These higher rates of return are required to compensate for the uncertainty inherent in the cropping systems of the farm. Also, in most cases, even though the variable costs of operating the precision agriculture system were higher, due to smaller operating widths, the additional returns generated by managing zones individually outweighed these additional costs. Further analysis also shows that the relative size of management zones has a marked effect on the returns generated and that it is possible to increase returns by taking out marginally productive zones.

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Bibliographic Info

Article provided by Elsevier in its journal Agricultural Systems.

Volume (Year): 100 (2009)
Issue (Month): 1-3 (April)
Pages: 80-87

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Handle: RePEc:eee:agisys:v:100:y:2009:i:1-3:p:80-87

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Web page: http://www.elsevier.com/locate/agsy

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Keywords: Investment analysis Real options Uncertainty Economics Precision agriculture;

References

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  1. Babcock, Bruce A. & Pautsch, Gregory R., 1998. "Moving from Uniform to Variable Fertilizer Rates on Iowa Corn: Effects on Rates and Returns," Staff General Research Papers 1121, Iowa State University, Department of Economics.
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  8. Pampolino, M.F. & Manguiat, I.J. & Ramanathan, S. & Gines, H.C. & Tan, P.S. & Chi, T.T.N. & Rajendran, R. & Buresh, R.J., 2007. "Environmental impact and economic benefits of site-specific nutrient management (SSNM) in irrigated rice systems," Agricultural Systems, Elsevier, vol. 93(1-3), pages 1-24, March.
  9. Lowenberg-DeBoer, James, 1999. "Risk Management Potential Of Precision Farming Technologies," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 31(02), August.
  10. Khanna, Madhu & Isik, Murat & Winter-Nelson, Alex, 2000. "Investment in site-specific crop management under uncertainty: implications for nitrogen pollution control and environmental policy," Agricultural Economics: The Journal of the International Association of Agricultural Economists, International Association of Agricultural Economists, vol. 24(1), December.
  11. Link, Johanna & Graeff, Simone & Batchelor, William David & Claupein, Wilhelm, 2006. "Evaluating the economic and environmental impact of environmental compensation payment policy under uniform and variable-rate nitrogen management," Agricultural Systems, Elsevier, vol. 91(1-2), pages 135-153, November.
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Cited by:
  1. Curtiss, Jarmila & Jelinek, Ladislav, 2012. "Cost Efficiency and Farm Self-selection in Precision Farming: The Case of Czech Wheat Production," 131st Seminar, September 18-19, 2012, Prague, Czech Republic 135784, European Association of Agricultural Economists.
  2. Heumesser, Christine & Fuss, Sabine & Szolgayova, Jana & Strauss, Franziska & Schmid, Erwin, 2011. "Investment in Irrigation Systems under Weather Uncertainty," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 114536, European Association of Agricultural Economists.
  3. Christine Heumesser & Sabine Fuss & Jana Szolgayová & Franziska Strauss & Erwin Schmid, 2012. "Investment in Irrigation Systems under Precipitation Uncertainty," Water Resources Management, Springer, vol. 26(11), pages 3113-3137, September.

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