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Investment in site-specific crop management under uncertainty: implications for nitrogen pollution control and environmental policy

  • Khanna, Madhu
  • Isik, Murat
  • Winter-Nelson, Alex

This paper applies an option-pricing model to analyze the impact of uncertainty about output prices and expectations of declining fixed costs on the optimal timing of investment in site-specific crop management (SSCM). It also analyzes the extent to which the level of spatial variability in soil conditions can mitigate the value of waiting to invest in SSCM and influence the optimal timing of adoption and create a preference for custom hiring rather than owner purchase of equipment. Numerical simulations show that while the net present value (NPV) rule predicts that immediate adoption is profitable under most of the soil conditions considered here, recognition of the option value of investment indicates that it is preferable to delay investment in SSCM for at least 3 years unless average soil quality is high and the variability in soil quality and fertility is high. The use of the option value approach reveals that the value of waiting to invest in SSCM raises the cost-share subsidy rates required to induce immediate adoption above the levels indicated by the NPV rule. © 2000 Elsevier Science B.V. All rights reserved.

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File URL: http://purl.umn.edu/176255
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Article provided by International Association of Agricultural Economists in its journal Agricultural Economics of Agricultural Economists.

Volume (Year): 24 (2000)
Issue (Month): 1 (December)
Pages:

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Handle: RePEc:ags:iaaeaj:176255
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  1. Bruce A. Babcock & Gregory R. Pautsch, 1997. "Moving from Uniform to Variable Fertilizer Rates on Iowa Corn: Effects on Rates and Returns," Center for Agricultural and Rural Development (CARD) Publications 97-wp182, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  2. Gary Kachanoski, 1999. "Economic Feasibility of Variable-Rate Technology for Nitrogen on Corn," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(4), pages 914-927.
  3. Watkins, K. Bradley & Lu, Yao-Chi & Huang, Wen-Yuan, 1998. "Economic And Environmental Feasibility Of Variable Rate Nitrogen Fertilizer Application With Carry-Over Effects," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 23(02), December.
  4. Alex Winter-Nelson & Koffi Amegbeto, 1998. "Option Values to Conservation and Agricultural Price Policy: Application to Terrace Construction in Kenya," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 80(2), pages 409-418.
  5. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
  6. Ray, Daryll E. & Richardson, James W. & Torre Ugarte, Daniel de la & Tiller, Kelly, 1998. "Estimating Price Variability In Agriculture: Implications For Decision Makers," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 30(01), July.
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