Valuing the Option to Switch to Organic Farming: An Application to U.S. Corn and Soybeans
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 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 InfoPaper provided by European Association of Agricultural Economists in its series 2005 International Congress, August 23-27, 2005, Copenhagen, Denmark with number 24716.
Date of creation: 2005
Date of revision:
option theory; organic farming; direct payments; switching regression; Conservation Security Program; Crop Production/Industries; D81; Q18;
Find related papers by JEL classification:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- Q18 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Policy; Food Policy
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