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Can Real Option Value Explain Why Producers Appear to Store Too Long?

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  • Kim, Hyun Seok
  • Brorsen, B. Wade

Abstract

Previous studies suggest that producers tend to store crops longer than makes economic sense. Since decisions to sell are irreversible, there can be a real option value from waiting to sell grain. This real option value may explain why producers appear to store too long. A seasonal mean reversion model is estimated that allows prices to be a random walk within a season, but mean reverting across crop years. Unless prices are extremely low, it is optimal for producers to sell before the mean reversion begins. Thus, the real option value of waiting cannot explain why producers seem to store at a loss in the latter part of crop years.

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File URL: http://purl.umn.edu/37602
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Bibliographic Info

Paper provided by NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management in its series 2008 Conference, April 21-22, 2008, St. Louis, Missouri with number 37602.

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Date of creation: 2008
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Handle: RePEc:ags:nccest:37602

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Keywords: real option value; seasonal mean reversion; Agricultural Finance;

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Cited by:
  1. Schmit, Todd M. & Luo, Jianchuan & Conrad, Jon M., 2010. "Estimating the Influence of Ethanol Policy on Plant Investment Decisions: A Real Options Analysis with Two Stochastic Variables," Working Papers 126963, Cornell University, Department of Applied Economics and Management.

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