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Uncertainty and investment in precision agriculture - Is it worth the money?

Listed author(s):
  • Tozer, Peter R.

Irreversibility and uncertainty render the standard capital budgeting techniques such as net present value (NPV) analysis insufficient as a decision criterion. The standard NPV underestimates the value of the investment by not including the value of waiting for new information to reduce the uncertainty of the cashflows generated by the investment. An alternative to NPV analysis is real options. In this study, we apply real options analysis to an investment decision for a grain producer in Western Australia. The investment choice is to either purchase machinery suitable for undertaking controlled traffic precision agriculture or acquire a conventional system and reduce sowing time. The results of the analysis suggest that the required rates of return for the two investment alternatives need to be approximately 96-156% higher than the rates of return used in the standard NPV analysis. These higher rates of return are required to compensate for the uncertainty inherent in the cropping systems of the farm. Also, in most cases, even though the variable costs of operating the precision agriculture system were higher, due to smaller operating widths, the additional returns generated by managing zones individually outweighed these additional costs. Further analysis also shows that the relative size of management zones has a marked effect on the returns generated and that it is possible to increase returns by taking out marginally productive zones.

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Article provided by Elsevier in its journal Agricultural Systems.

Volume (Year): 100 (2009)
Issue (Month): 1-3 (April)
Pages: 80-87

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Handle: RePEc:eee:agisys:v:100:y:2009:i:1-3:p:80-87
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  1. Andrew W. Lo, A. Craig MacKinlay, 1988. "Stock Market Prices do not Follow Random Walks: Evidence from a Simple Specification Test," Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 41-66.
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  9. Babcock, Bruce A. & Pautsch, Gregory R., 1998. "Moving From Uniform To Variable Fertilizer Rates On Iowa Corn: Effects On Rates And Returns," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 23(02), December.
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  12. Lowenberg-DeBoer, James, 1999. "Risk Management Potential Of Precision Farming Technologies," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 31(02), August.
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