Uncertainty and investment in precision agriculture - Is it worth the money?
AbstractIrreversibility 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Agricultural Systems.
Volume (Year): 100 (2009)
Issue (Month): 1-3 (April)
Contact details of provider:
Web page: http://www.elsevier.com/locate/agsy
Investment analysis Real options Uncertainty Economics Precision agriculture;
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Babcock, Bruce A. & Pautsch, Gregory R., 1998. "Moving From Uniform To Variable Fertilizer Rates On Iowa Corn: Effects On Rates And Returns," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 23(02), December.
- Bruce A. Babcock & Gregory R. Pautsch, 1997. "Moving from Uniform to Variable Fertilizer Rates on Iowa Corn: Effects on Rates and Returns," Center for Agricultural and Rural Development (CARD) Publications 97-wp182, Center for Agricultural and Rural Development (CARD) at Iowa State University.
- 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.
- Avinash Dixit, 1992. "Investment and Hysteresis," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 107-132, Winter.
- Andrew W. Lo & A. Craig MacKinlay, 1987.
"Stock Market Prices Do Not Follow Random Walks: Evidence From a Simple Specification Test,"
NBER Working Papers
2168, National Bureau of Economic Research, Inc.
- Andrew W. Lo, A. Craig MacKinlay, 1988. "Stock Market Prices do not Follow Random Walks: Evidence from a Simple Specification Test," Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 41-66.
- 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, Blackwell, vol. 24(1), pages 9-21, December.
- Sadler, E. J. & Gerwig, B. K. & Evans, D. E. & Busscher, W. J. & Bauer, P. J., 2000. "Site-specific modeling of corn yield in the SE coastal plain," Agricultural Systems, Elsevier, vol. 64(3), pages 189-207, June.
- Pringle, M. J. & McBratney, A. B. & Whelan, B. M. & Taylor, J. A., 2003. "A preliminary approach to assessing the opportunity for site-specific crop management in a field, using yield monitor data," Agricultural Systems, Elsevier, vol. 76(1), pages 273-292, April.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.