Valuing the Option to Convert from Conventional to Organic Farming
AbstractBased on option value theory, we develop a theoretical model to assess the dollar compensation required for the conversion to organic farming. Our empirical model is a switching regression model with two regimes and we use county level data on organic and conventional corn and soybean production in the U.S. for the application. Assuming an interest rate of 10 percent, a conventional corn-soybean grower would need to receive a one-time payment of $315 per acre to compensate for the conversion cost and an additional $1,088 per acre to conver the long run higher production and market risks. The sum of these two values equals an annual payment of $228 per acre for a 10 year contract. The results are discussed in the context of the recently introduced Conservation Security Program, which wil make direct payments to US farmers for organic practices.
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.
Bibliographic InfoPaper provided by American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) in its series 2005 Annual meeting, July 24-27, Providence, RI with number 19531.
Date of creation: 2005
Date of revision:
Contact details of provider:
Postal: 555 East Wells Street, Suite 1100, Milwaukee, Wisconsin 53202
Phone: (414) 918-3190
Fax: (414) 276-3349
Web page: http://www.aaea.org
More information through EDIRC
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.:
- Lyubov Kurkalova & Catherine Kling & Jinhua Zhao, 2006.
"Green Subsidies in Agriculture: Estimating the Adoption Costs of Conservation Tillage from Observed Behavior,"
Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie,
Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 54(2), pages 247-267, 06.
- Kling, Catherine L. & Kurkalova, Lyubov A. & Zhao, Jinhua, 2006. "Green Subsidies in Agriculture: Estimating the Adoption Costs of Conservation Tillage from Observed Behavior," Staff General Research Papers 12344, Iowa State University, Department of Economics.
- Spiller, Pablo T & Huang, Cliff J, 1986. "On the Extent of the Market: Wholesale Gasoline in the Northeastern United States," Journal of Industrial Economics, Wiley Blackwell, vol. 35(2), pages 131-45, December.
- Merton, Robert C., 1975.
"Option pricing when underlying stock returns are discontinuous,"
787-75., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Merton, Robert C., 1976. "Option pricing when underlying stock returns are discontinuous," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 125-144.
- Pfann, Gerard Antonie, 2000.
"Options to Quit,"
CEPR Discussion Papers
2563, C.E.P.R. Discussion Papers.
- Lohr, Luanne & Salomonsson, Lennart, 2000. "Conversion subsidies for organic production: results from Sweden and lessons for the United States," Agricultural Economics: The Journal of the International Association of Agricultural Economists, International Association of Agricultural Economists, vol. 22(2), March.
- Greene, Catherine R., 2001. "U.S. Organic Farming Emerges in the 1990s: Adoption of Certified Systems," Agricultural Information Bulletins 33777, United States Department of Agriculture, Economic Research Service.
- Lohr, Luanne & Salomonsson, Lennart, 1998.
"Conversion Subsidies For Organic Production: Results From Sweden And Lessons For The United States,"
16640, University of Georgia, Department of Agricultural and Applied Economics.
- Lohr, Luanne & Salomonsson, Lennart, 2000. "Conversion subsidies for organic production: results from Sweden and lessons for the United States," Agricultural Economics, Blackwell, vol. 22(2), pages 133-146, March.
- Lohr, Luanne, 2001. "The Importance Of The Conservation Security Act To Us Competitiveness In Global Organic Markets," Faculty Series 16706, University of Georgia, Department of Agricultural and Applied Economics.
- MacInnis, Bo, 2004. "Transaction Costs And Organic Marketing: Evidence From U.S. Organic Produce Farmers," 2004 Annual meeting, August 1-4, Denver, CO 20386, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
- McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November.
- Musshoff, Oliver & Hirschauer, Norbert, 2008. "Investment planning under uncertainty and flexibility: the case of a purchasable sales contract," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 52(1), March.
- Lau, Michael H. & Hanagriff, Roger D. & Constance, Douglas H. & York, Mary, 2008. "Discerning Differences between Producer Groups and Organic Adoption Barriers in Texas," 2008 Annual Meeting, February 2-6, 2008, Dallas, Texas 6873, Southern Agricultural Economics Association.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (AgEcon Search).
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.