Switching to Perennial Energy Crops under Uncertainty and Costly Reversibility
We study a farmer’s decision to convert traditional crop land into growing dedicated energy crops, taking in account sunk conversion costs, uncertainties in traditional and energy crop returns, and learning. The optimal decision rules differ significantly from the expected net present value rule, which ignores learning, and from real option models that allow only one way conversions into energy crops. These models also predict drastically different patterns of land conversions into and out of energy crops over time. Using corn-soybean rotations and switchgrass as examples, we show that the model predictions are sensitive to assumptions about stochastic processes of the returns. Government policies might have unintended consequences: subsidizing conversion costs into switchgrass reduces proportions of land in switchgrass in the long run.
|Date of creation:||Dec 2009|
|Date of revision:|
|Contact details of provider:|| Postal: Justin S. Morrill Hall of Agriculture, 446 West Circle Dr., Rm 202, East Lansing, MI 48824-1039|
Phone: (517) 355-4563
Fax: (517) 432-1800
Web page: http://www.aec.msu.edu/agecon/
More information through EDIRC
References listed on IDEAS
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.:
- Searchinger, Timothy & Heimlich, Ralph & Houghton, R. A. & Dong, Fengxia & Elobeid, Amani & Fabiosa, Jacinto F. & Tokgoz, Simla & Hayes, Dermot J. & Yu, Hun-Hsiang, 2008. "Use of U.S. Croplands for Biofuels Increases Greenhouse Gases Through Emissions from Land-Use Change," Staff General Research Papers 12881, Iowa State University, Department of Economics.
- Ilhem Kassar & Pierre Lasserre, 2002.
"Species Preservation and Biodiversity Value: A Real Options Approach,"
Cahiers de recherche du Département des sciences économiques, UQAM
20-18, Université du Québec à Montréal, Département des sciences économiques.
- Kassar, Ilhem & Lasserre, Pierre, 2004. "Species preservation and biodiversity value: a real options approach," Journal of Environmental Economics and Management, Elsevier, vol. 48(2), pages 857-879, September.
- Ilhem Kassar & Pierre Lasserre, 2002. "Species Preservation and Biodiversity Value: A Real Options Approach," CIRANO Working Papers 2002s-82, CIRANO.
- Dixit, Avinash K, 1989.
"Entry and Exit Decisions under Uncertainty,"
Journal of Political Economy,
University of Chicago Press, vol. 97(3), pages 620-38, June.
- Nostbakken, Linda, 2006. "Regime switching in a fishery with stochastic stock and price," Journal of Environmental Economics and Management, Elsevier, vol. 51(2), pages 231-241, March.
- Conrad, Jon M. & Kotani, Koji, 2005. "When to drill? Trigger prices for the Arctic National Wildlife Refuge," Resource and Energy Economics, Elsevier, vol. 27(4), pages 273-286, November.
- Schatzki, Todd, 2003. "Options, uncertainty and sunk costs:: an empirical analysis of land use change," Journal of Environmental Economics and Management, Elsevier, vol. 46(1), pages 86-105, July.
- Irwin, Elena G. & Bockstael, Nancy E., 2004. "Land use externalities, open space preservation, and urban sprawl," Regional Science and Urban Economics, Elsevier, vol. 34(6), pages 705-725, November.
- Lubowski, Ruben N. & Vesterby, Marlow & Bucholtz, Shawn & Baez, Alba & Roberts, Michael J., 2006. "Major Uses of Land in The United States, 2002," Economic Information Bulletin 7203, United States Department of Agriculture, Economic Research Service.
- Fumasi, Roland J. & Richardson, James W. & Outlaw, Joe L., 2008. "The Economics Of Growing And Delivering Cellulosic Feedstocks In The Beaumont, Texas Area," 2008 Annual Meeting, February 2-6, 2008, Dallas, Texas 6788, Southern Agricultural Economics Association.
- Capozza, Dennis & Li, Yuming, 1994. "The Intensity and Timing of Investment: The Case of Land," American Economic Review, American Economic Association, vol. 84(4), pages 889-904, September.
- Marie Walsh & Daniel de la Torre Ugarte & Hosein Shapouri & Stephen Slinsky, 2003. "Bioenergy Crop Production in the United States: Potential Quantities, Land Use Changes, and Economic Impacts on the Agricultural Sector," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 24(4), pages 313-333, April.
- Hallam, Arne & Anderson, I. C. & Buxton, D. R., 2001. "Comparative Economic Analysis of Perennial, Annual and Intercrops for Biomass Production," Staff General Research Papers 5076, Iowa State University, Department of Economics.
- Williams, Jeffery R. & Llewelyn, Richard V. & Pendell, Dustin L. & Schlegel, Alan J. & Troy, Dumler, 2009. "A Risk Analysis of Converting CRP Acres to a Wheat-Sorghum-Fallow Rotation," 2009 Annual Meeting, January 31-February 3, 2009, Atlanta, Georgia 45985, Southern Agricultural Economics Association.
- Mason, Charles F., 2001. "Nonrenewable Resources with Switching Costs," Journal of Environmental Economics and Management, Elsevier, vol. 42(1), pages 65-81, July.
- Titman, Sheridan, 1985. "Urban Land Prices under Uncertainty," American Economic Review, American Economic Association, vol. 75(3), pages 505-14, June.
- Dangl, Thomas & Wirl, Franz, 2004. "Investment under uncertainty: calculating the value function when the Bellman equation cannot be solved analytically," Journal of Economic Dynamics and Control, Elsevier, vol. 28(7), pages 1437-1460, April.
- Margaret Insley & Kimberly Rollins, 2005. "On Solving the Multirotational Timber Harvesting Problem with Stochastic Prices: A Linear Complementarity Formulation," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 87(3), pages 735-755.
- Jensen, Kimberly L. & Clark, Christopher D. & Ellis, Pamela & English, Burton C. & Menard, R. Jamey & Walsh, Marie E., 2006. "Farmer Willingness to Grow Switchgrass for Energy Production," 2006 Annual meeting, July 23-26, Long Beach, CA 21355, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
When requesting a correction, please mention this item's handle: RePEc:ags:midasp:56195. 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.