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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
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    File URL: http://purl.umn.edu/19531
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    References listed on IDEAS

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    1. MacInnis, Bo, 2004. "Transaction Costs And Organic Marketing: Evidence From U.S. Organic Produce Farmers," 2004 Annual meeting, August 1-4, Denver, CO 20386, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    2. Lyubov Kurkalova & Catherine Kling & Jinhua Zhao, 2006. "Green Subsidies in Agriculture: Estimating the Adoption Costs of Conservation Tillage from Observed Behavior," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 54(2), pages 247-267, June.
    3. Pfann, Gerard A., 2001. "Options to quit," Economics Letters, Elsevier, vol. 70(2), pages 259-265, February.
    4. Lohr, Luanne, 2001. "The Importance Of The Conservation Security Act To Us Competitiveness In Global Organic Markets," Faculty Series 16706, University of Georgia, Department of Agricultural and Applied Economics.
    5. Lohr, Luanne & Salomonsson, Lennart, 2000. "Conversion subsidies for organic production: results from Sweden and lessons for the United States," Agricultural Economics of Agricultural Economists, International Association of Agricultural Economists, vol. 22(2), March.
    6. Spiller, Pablo T & Huang, Cliff J, 1986. "On the Extent of the Market: Wholesale Gasoline in the Northeastern United States," Journal of Industrial Economics, Wiley Blackwell, vol. 35(2), pages 131-145, December.
    7. Merton, Robert C., 1976. "Option pricing when underlying stock returns are discontinuous," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 125-144.
    8. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, Oxford University Press, vol. 101(4), pages 707-727.
    9. Greene, Catherine R., 2001. "U.S. Organic Farming Emerges in the 1990s: Adoption of Certified Systems," Agricultural Information Bulletins 33777, United States Department of Agriculture, Economic Research Service.
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    Cited by:

    1. Oliver Musshoff & Norbert Hirschauer, 2008. "Investment planning under uncertainty and flexibility: the case of a purchasable sales contract ," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 52(1), pages 17-36, March.
    2. 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.
    3. 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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    Keywords

    Farm Management;

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