Valuing the Option to Switch to Organic Farming: An Application to U.S. Corn and Soybeans
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.
|Date of creation:||2005|
|Date of revision:|
|Contact details of provider:|| Web page: http://www.eaae.org|
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Martin Odening & Oliver Mu�hoff & Alfons Balmann, 2005. "Investment decisions in hog finishing: an application of the real options approach," Agricultural Economics, International Association of Agricultural Economists, vol. 32(1), pages 47-60, 01.
- 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.
- Lohr, Luanne & Salomonsson, Lennart, 2000. "Conversion subsidies for organic production: results from Sweden and lessons for the United States," Agricultural Economics, Blackwell, vol. 22(2), pages 133-146, March.
- Lohr, Luanne & Salomonsson, Lennart, 1998. "Conversion Subsidies For Organic Production: Results From Sweden And Lessons For The United States," Faculty Series 16640, University of Georgia, Department of Agricultural and Applied Economics.
- 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.
- 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).
- 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.
- McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November.
- Pfann, Gerard A., 2000.
"Options to Quit,"
IZA Discussion Papers
197, Institute for the Study of Labor (IZA).
- 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, 06.
- Kling, Catherine L. & Kurkalova, Lyubov A. & Zhao, Jinhua, 2006. "Green Subsidies in Agriculture: Estimating the Adoption Costs of Conservation Tillage from Observed Behavior," Staff General Research Papers 12344, Iowa State University, Department of Economics.
- 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 131-45, December.
When requesting a correction, please mention this item's handle: RePEc:ags:eaae05:24716. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (AgEcon Search)
If references are entirely missing, you can add them using this form.