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Using Real Options To Evaluate Producer Investment In New Generation Cooperatives

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  • Sporleder, Thomas L.
  • Bailey, Michael D.

Abstract

New Generation Cooperatives have emerged as a contemporary means for farmers to invest in further processing activities. This paper considers real options as the basis for evaluating producer investment in a start-up cooperative that involves technological uncertainty. The investment and risk inherent in producer membership in an NGC is analyzed using real options theory logic. Real options theory has recently been extended to technology positioning projects and how the extent of uncertainty influences the value of a technology "option". Conventional net present value formulas have been shown to be limited when the conditions of the investment require substantial commitment under uncertainty, such as investments in technology. Implications for producers are drawn from the analysis. Producers always have the alternative of not investing in the initial start-up but waiting and buying in at a later time, perhaps when less uncertainty prevails. Results indicate that producers are better able to evaluate investment in a NGC using real options.

Suggested Citation

  • Sporleder, Thomas L. & Bailey, Michael D., 2001. "Using Real Options To Evaluate Producer Investment In New Generation Cooperatives," 2001 Annual meeting, August 5-8, Chicago, IL 20725, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    • Handle: RePEc:ags:aaea01:20725
    DOI: 10.22004/ag.econ.20725
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    References listed on IDEAS

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    1. Martha Amram & Nalin Kulatilaka, 2000. "Strategy And Shareholder Value Creation: The Real Options Frontier," Journal of Applied Corporate Finance, Morgan Stanley, vol. 13(2), pages 15-28, June.
    2. Poray, Michael C. & Ginder, Roger G., 1999. "Comparing Alternative Closed Swine Production Cooperatives: Adding Value to Corn Under Uncertainty," Journal of Cooperatives, NCERA-210, vol. 14, pages 1-21.
    3. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    4. Patrie, William, 1998. "Creating ‘Co-op Fever’ A Rural Developer’s Guide To Forming Cooperatives," Service Reports (SR) 280698, United States Department of Agriculture, Rural Development.
    5. Harris, Andrea & Stefanson, Brenda & Fulton, Murray E., 1996. "New Generation Cooperatives and Cooperative Theory," Journal of Cooperatives, NCERA-210, vol. 11, pages 1-15.
    6. Poray, Michael C. & Ginder, Roger, 1999. "Comparing Alternative Closed Swine Production Cooperatives: Adding Value to Corn Under Uncertainty," Staff General Research Papers Archive 1556, Iowa State University, Department of Economics.
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    Cited by:

    1. Engel, Phoebe D. & Hyde, Jeffrey, 2003. "A Real Options Analysis of Automatic Milking Systems," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 32(2), pages 1-13, October.
    2. Srinivasan, R., 2011. "The Cost of Risky Debt in Cooperatives," Journal of Cooperatives, NCERA-210, vol. 25, pages 1-16.
    3. Holland, Steven Jerry, 2004. "Investment in a Thin and Uncertain Market: A Dynamic Study of the Formation and Stability of New Generation Cooperatives," Faculty and Alumni Dissertations 307221, University of Minnesota, Department of Applied Economics.

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