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Stochastic simulation using @Risk for dairy business investment decisions

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Author Info

  • J.M. Bewley
  • M.D. Boehlje
  • A.W. Gray
  • H. Hogeveen
  • S.J. Kenyon
  • S.D. Eicher
  • M.M. Schutz

Abstract

Purpose – The purpose of this paper is to develop a dynamic, stochastic, mechanistic simulation model of a dairy business to evaluate the cost and benefit streams coinciding with technology investments. The model was constructed to embody the biological and economical complexities of a dairy farm system within a partial budgeting framework. A primary objective was to establish a flexible, user-friendly, farm-specific, decision-making tool for dairy producers or their advisers and technology manufacturers. Design/methodology/approach – The basic deterministic model was created in Microsoft Excel (Microsoft, Seattle, Washington). The @Risk add-in (Palisade Corporation, Ithaca, New York) for Excel was employed to account for the stochastic nature of key variables within a Monte Carlo simulation. Net present value was the primary metric used to assess the economic profitability of investments. The model was composed of a series of modules, which synergistically provide the necessary inputs for profitability analysis. Estimates of biological relationships within the model were obtained from the literature in an attempt to represent an average or typical US dairy. Technology benefits were appraised from the resulting impact on disease incidence, disease impact, and reproductive performance. In this paper, the model structure and methodology were described in detail. Findings – Examples of the utility of examining the influence of stochastic input and output prices on the costs of culling, days open, and disease were examined. Each of these parameters was highly sensitive to stochastic prices and deterministic inputs. Originality/value – Decision support tools, such as this one, that are designed to investigate dairy business decisions may benefit dairy producers.

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Bibliographic Info

Article provided by Emerald Group Publishing in its journal Agricultural Finance Review.

Volume (Year): 70 (2010)
Issue (Month): 1 (May)
Pages: 97-125

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Handle: RePEc:eme:afrpps:v:70:y:2010:i:1:p:97-125

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Web page: http://www.emeraldinsight.com

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Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
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Web: http://www.emeraldinsight.com/afr.htm

Related research

Keywords: Agriculture; Investment appraisal; Modelling; Net present value; Stochastic processes;

References

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  1. Richard Bennett, 2003. "The 'Direct Costs'of Livestock Disease: The Development of a System of Models for the Analysis of 30 Endemic Livestock Diseases in Great Britain," Journal of Agricultural Economics, Wiley Blackwell, vol. 54(1), pages 55-71.
  2. Verstegen , J.A.A.M. & Huirne, R.B.M. & Dijkhuizen, A.A. & Kleijnen, J.P.C., 1995. "Economic value of management information systems in agriculture: A review of in evaluation approaches," Open Access publications from Tilburg University urn:nbn:nl:ui:12-369795, Tilburg University.
  3. John Mclnerney, 1996. "Old Economics For New Problems -Livestock Disease: Presidential Address," Journal of Agricultural Economics, Wiley Blackwell, vol. 47(1-4), pages 295-314.
  4. Sorensen, Jan Tind & Kristensen, Erik Steen & Thysen, Iver, 1992. "A stochastic model simulating the dairy herd on a PC," Agricultural Systems, Elsevier, vol. 39(2), pages 177-200.
  5. Dijkhuizen, A. A. & Renkema, J. A. & Stelwagen, J., 1991. "Modelling to support animal health control," Agricultural Economics: The Journal of the International Association of Agricultural Economists, International Association of Agricultural Economists, vol. 5(3), July.
  6. Martin Odening & Oliver Mu�hoff & Alfons Balmann, 2005. "Investment decisions in hog finishing: an application of the real options approach," Agricultural Economics, International Association of Agricultural Economists, vol. 32(1), pages 47-60, 01.
  7. Dijkhuizen, A. A. & Renkema, J. A. & Stelwagen, J., 1991. "Modelling to support animal health control," Agricultural Economics, Blackwell, vol. 5(3), pages 263-277, July.
  8. Clark Seavert & Herbert Hinman & Karen Klonsky, 2006. "A crop profitability analysis for long-term crop investments," Agricultural Finance Review, Emerald Group Publishing, vol. 66(1), pages 125-135, May.
  9. Huirne, Ruud, 1990. "Basic Concepts of Computerised Support for Farm Management Decisions," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 17(1), pages 69-84.
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Cited by:
  1. J.M. Bewley & M.D. Boehlje & A.W. Gray & H. Hogeveen & S.J. Kenyon & S.D. Eicher & M.M. Schutz, 2010. "Assessing the potential value for an automated dairy cattle body condition scoring system through stochastic simulation," Agricultural Finance Review, Emerald Group Publishing, vol. 70(1), pages 126-150, May.

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