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Switching to Perennial Energy Crops Under Uncertainty and Costly Reversibility

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  • Feng Song
  • Jinhua Zhao
  • Scott M. Swinton

Abstract

We study a farmer's decision to convert traditional cropland into land for growing dedicated energy crops, taking into account sunk conversion costs and uncertainties in crop returns. The optimal decision rules differ significantly from the expected net present value rule, which ignores uncertainties, and from real options models that allow only one-way conversion into energy crops. These models also predict drastically different patterns of land conversions into and out of energy crops over time. Using corn--soybean rotation and switchgrass as examples, we show that the model predictions are sensitive to assumptions about stochastic processes of the returns. Government policies might have unintended consequences: subsidizing conversion costs into switchgrass may not much affect proportions of land in switchgrass in the long run. Copyright 2011, Oxford University Press.

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  • Feng Song & Jinhua Zhao & Scott M. Swinton, 2011. "Switching to Perennial Energy Crops Under Uncertainty and Costly Reversibility," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 93(3), pages 764-779.
  • Handle: RePEc:oup:ajagec:v:93:y:2011:i:3:p:764-779
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    JEL classification:

    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q24 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Land

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