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Valuing the Option to Switch to Organic Farming: An Application to U.S. Corn and Soybeans

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  • Wossink, Ada
  • Kuminoff, Nicolai V.

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 cover 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 contact. The results are discussed in the context of the recently introduced Conservation Security Program, which will make direct payments to US farmers for organic practices.

Suggested Citation

  • Wossink, Ada & Kuminoff, Nicolai V., 2005. "Valuing the Option to Switch to Organic Farming: An Application to U.S. Corn and Soybeans," 2005 International Congress, August 23-27, 2005, Copenhagen, Denmark 24716, European Association of Agricultural Economists.
    • Handle: RePEc:ags:eaae05:24716
    DOI: 10.22004/ag.econ.24716
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    References listed on IDEAS

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    Cited by:

    1. Zein Kallas & Teresa Serra & José Maria Gil, 2010. "Farmers’ objectives as determinants of organic farming adoption: the case of Catalonian vineyard production," Agricultural Economics, International Association of Agricultural Economists, vol. 41(5), pages 409-423, September.

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