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Valuing the Option to Switch to Organic Farming: An Application to U.S. Corn and Soybeans

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  • Wossink, Ada
  • Kuminoff, Nicolai V.

Abstract

Based 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 cover 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 contact. The results are discussed in the context of the recently introduced Conservation Security Program, which will make direct payments to US farmers for organic practices.

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Bibliographic Info

Paper provided by European Association of Agricultural Economists in its series 2005 International Congress, August 23-27, 2005, Copenhagen, Denmark with number 24716.

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Date of creation: 2005
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Handle: RePEc:ags:eaae05:24716

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Related research

Keywords: option theory; organic farming; direct payments; switching regression; Conservation Security Program; Crop Production/Industries; D81; Q18;

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  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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.
  8. Pfann, Gerard A., 2000. "Options to Quit," IZA Discussion Papers 197, Institute for the Study of Labor (IZA).
  9. 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).
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