IDEAS home Printed from
   My bibliography  Save this article

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


  • 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.

Suggested Citation

  • Tozer, Peter R., 2009. "Uncertainty and investment in precision agriculture - Is it worth the money?," Agricultural Systems, Elsevier, vol. 100(1-3), pages 80-87, April.
  • Handle: RePEc:eee:agisys:v:100:y:2009:i:1-3:p:80-87

    Download full text from publisher

    File URL:
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    1. 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.
    2. Sadler, E. J. & Gerwig, B. K. & Evans, D. E. & Busscher, W. J. & Bauer, P. J., 2000. "Site-specific modeling of corn yield in the SE coastal plain," Agricultural Systems, Elsevier, vol. 64(3), pages 189-207, June.
    3. Lowenberg-DeBoer, J., 1999. "Risk Management Potential of Precision Farming Technologies," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 31(02), pages 275-285, August.
    4. Tozer, Peter R., 2005. "Depreciation Rates for Australian Tractors and Headers - Is Machinery Depreciation a Fixed or Variable Cost?," 2005 Conference (49th), February 9-11, 2005, Coff's Harbour, Australia 137951, Australian Agricultural and Resource Economics Society.
    5. Khanna, Madhu & Isik, Murat & Winter-Nelson, Alex, 2000. "Investment in site-specific crop management under uncertainty: implications for nitrogen pollution control and environmental policy," Agricultural Economics of Agricultural Economists, International Association of Agricultural Economists, vol. 24(1), December.
    6. 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.
    7. 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.
    8. Pringle, M. J. & McBratney, A. B. & Whelan, B. M. & Taylor, J. A., 2003. "A preliminary approach to assessing the opportunity for site-specific crop management in a field, using yield monitor data," Agricultural Systems, Elsevier, vol. 76(1), pages 273-292, April.
    9. Avinash Dixit, 1992. "Investment and Hysteresis," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 107-132, Winter.
    10. Murat Isik, 2006. "Implications of alternative stochastic processes for investment in agricultural technologies," Applied Economics Letters, Taylor & Francis Journals, vol. 13(1), pages 21-27.
    11. Link, Johanna & Graeff, Simone & Batchelor, William David & Claupein, Wilhelm, 2006. "Evaluating the economic and environmental impact of environmental compensation payment policy under uniform and variable-rate nitrogen management," Agricultural Systems, Elsevier, vol. 91(1-2), pages 135-153, November.
    12. Pampolino, M.F. & Manguiat, I.J. & Ramanathan, S. & Gines, H.C. & Tan, P.S. & Chi, T.T.N. & Rajendran, R. & Buresh, R.J., 2007. "Environmental impact and economic benefits of site-specific nutrient management (SSNM) in irrigated rice systems," Agricultural Systems, Elsevier, vol. 93(1-3), pages 1-24, March.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Christine Heumesser & Sabine Fuss & Jana Szolgayová & Franziska Strauss & Erwin Schmid, 2012. "Investment in Irrigation Systems under Precipitation Uncertainty," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 26(11), pages 3113-3137, September.
    2. Lescot, Jean-Marie & Rousset, Sylvain & Souville, Genevieve, 2011. "Assessing Investment in Precision Farming for Reducing Pesticide Use in French Viticulture," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 114387, European Association of Agricultural Economists.
    3. Cavallo, Eugenio & Ferrari, Ester & Bollani, Luigi & Coccia, Mario, 2014. "Attitudes and behaviour of adopters of technological innovations in agricultural tractors: A case study in Italian agricultural system," Agricultural Systems, Elsevier, vol. 130(C), pages 44-54.
    4. Heumesser, Christine & Fuss, Sabine & Szolgayova, Jana & Strauss, Franziska & Schmid, Erwin, 2011. "Investment in Irrigation Systems under Weather Uncertainty," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 114536, European Association of Agricultural Economists.
    5. Curtiss, Jarmila & Jelinek, Ladislav, 2012. "Cost Efficiency and Farm Self-selection in Precision Farming: The Case of Czech Wheat Production," 131st Seminar, September 18-19, 2012, Prague, Czech Republic 135784, European Association of Agricultural Economists.
    6. Schimmelpfennig, David & Ebel, Robert, 2016. "Sequential Adoption and Cost Savings from Precision Agriculture," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 41(1), January.


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:agisys:v:100:y:2009:i:1-3:p:80-87. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.