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Farmer demand for financial record-keeping system attributes

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  • Christopher A. Wolf
  • Frank Lupi
  • Stephen Harsh

Abstract

Purpose – Investment decisions by agribusiness firms are costly and subject to high volatility and uncertainty. In many cases, the project value is not only determined by its cash-flows stream and financial side effects but also by the presence of substantial future uncertainty such as project implementation delay and growth opportunities. The purpose of this paper is to evaluate an agribusiness project taking into account these two options and to illustrate the how risks that evolve over time can affect sequential investment decisions in the oleic oil industry in Tunisia. Design/methodology/approach – The methodology used to capture the investment project value and analyze the impact of lags between the initial investment decision and its implementation on project value is based on a decision tree method and binomial lattice method (which adds growth option). The project valuation is based, first on actual data at the time of the initial decision and second the authors use the full information to report on the true value of the investment opportunity as real time evolved. Findings – Findings show that time to build is a very important factor in valuing an agribusiness especially when efficiency is strongly governed by climatic conditions and international market uncertainty. Our real options approach shows that production delays can deteriorate the follow-on project value by as much as 53 percent. The implicit growth option falls to only 27 percent of the total project value while it was about 58 percent according to the standard forecast. The delay in project implementation not only affects the firm project financing costs and the loss of revenue, but also it contributes to modify the initial marketing strategy. Originality/value – The paper is a first application of real option approach to the oleic oil industry. The methodology used in the paper can be adapted by practitioners and investors to adequately value oleic projects.

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Bibliographic Info

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

Volume (Year): 71 (2011)
Issue (Month): 2 (July)
Pages: 259-276

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Handle: RePEc:eme:afrpps:v:71:y:2011:i:2:p:259-276

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Related research

Keywords: Accounting systems; Consumer behaviour; Farms; Financial management; Records management; United States of America;

References

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  1. Brian Roe & Thomas L. Sporleder & Betsy Belleville, 2004. "Hog Producer Preferences for Marketing Contract Attributes," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(1), pages 115-123.
  2. Maria L. Loureiro & Jill J. McCluskey & Ron C. Mittelhammer, 2003. "Are Stated Preferences Good Predictors of Market Behavior?," Land Economics, University of Wisconsin Press, vol. 79(1), pages 44-45.
  3. Lawrence Rubey & Frank Lupi, 1997. "Predicting the Effects of Market Reform in Zimbabwe: A Stated Preference Approach," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(1), pages 89-99.
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  6. Arne Risa Hole, 2006. "A comparison of approaches to estimating confidence intervals for willingness to pay measures," Working Papers 008cherp, Centre for Health Economics, University of York.
  7. Tonsor, Glynn T. & Schroeder, Ted C. & Fox, John A. & Biere, Arlo W., 2005. "European Preferences for Beef Steak Attributes," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 30(02), August.
  8. Wiktor Adamowicz & Peter Boxall & Michael Williams & Jordan Louviere, 1998. "Stated Preference Approaches for Measuring Passive Use Values: Choice Experiments and Contingent Valuation," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 80(1), pages 64-75.
  9. Gloy, Brent A. & Hyde, Jeffrey & LaDue, Eddy L., 2002. "Dairy Farm Management and Long-Term Farm Financial Performance," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 31(2), October.
  10. Jayson L. Lusk & Jutta Roosen & John A. Fox, 2003. "Demand for Beef from Cattle Administered Growth Hormones or Fed Genetically Modified Corn: A Comparison of Consumers in France, Germany, the United Kingdom, and the United States," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 85(1), pages 16-29.
  11. Karen Blumenschein & Magnus Johannesson & Glenn C. Blomquist & Bengt Liljas & Richard M. O’Conor, 1998. "Experimental Results on Expressed Certainty and Hypothetical Bias in Contingent Valuation," Southern Economic Journal, Southern Economic Association, vol. 65(1), pages 169-177, July.
  12. Jayson L. Lusk & Darren Hudson, 2004. "Willingness-to-Pay Estimates and Their Relevance to Agribusiness Decision Making," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 26(2), pages 152-169.
  13. Wayne H. Howard & Glen C. Filson, 1994. "An Evaluation of the Ontario Farm Business Management Association Program," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 42(3), pages 327-341, November.
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