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Valuing the Option to Convert from Conventional to Organic Farming

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  • Kuminoff, Nicolai V.
  • Wossink, Ada

Abstract

Based on option value theory, we develop a theoretical model to assess the dollar compensation required for the conversion to organic farming. Our empirical model is a switching regression model with two regimes and we use county level data on organic and conventional corn and soybean production in the U.S. for the application. Assuming an interest rate of 10 percent, a conventional corn-soybean grower would need to receive a one-time payment of $315 per acre to compensate for the conversion cost and an additional $1,088 per acre to conver the long run higher production and market risks. The sum of these two values equals an annual payment of $228 per acre for a 10 year contract. The results are discussed in the context of the recently introduced Conservation Security Program, which wil make direct payments to US farmers for organic practices.

Suggested Citation

  • Kuminoff, Nicolai V. & Wossink, Ada, 2005. "Valuing the Option to Convert from Conventional to Organic Farming," 2005 Annual meeting, July 24-27, Providence, RI 19531, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    • Handle: RePEc:ags:aaea05:19531
    DOI: 10.22004/ag.econ.19531
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    Cited by:

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    2. Mohammad Khaledi & Simon Weseen & Erin Sawyer & Shon Ferguson & Richard Gray, 2010. "Factors Influencing Partial and Complete Adoption of Organic Farming Practices in Saskatchewan, Canada," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 58(1), pages 37-56, March.
    3. Marc Baudry & Edouard Civel & Camille Tévenart, 2023. "Land allocation and the adoption of innovative practices in agriculture: a real option modelling of the underlying hidden costs," Working Papers hal-04159839, HAL.
    4. Lau, Michael H. & Hanagriff, Roger D. & Constance, Douglas H. & York, Mary, 2008. "Discerning Differences between Producer Groups and Organic Adoption Barriers in Texas," 2008 Annual Meeting, February 2-6, 2008, Dallas, Texas 6873, Southern Agricultural Economics Association.
    5. Lau, Michael H. & Hanagriff, Roger D. & Constance, Douglas H. & York, Mary & VanDelist, Brian & Higgins, Lindsey M., 2010. "Discerning Differences among Producer Groups and Organic Adoption Barriers in Texas," Journal of Food Distribution Research, Food Distribution Research Society, vol. 41(2), pages 1-13, July.
    6. Oliver Musshoff & Norbert Hirschauer, 2008. "Adoption of organic farming in Germany and Austria: an integrative dynamic investment perspective," Agricultural Economics, International Association of Agricultural Economists, vol. 39(1), pages 135-145, July.

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