Adoption of organic farming in Germany and Austria: an integrative dynamic investment perspective

Farm‐level adaptation to changing economic environments is often slower than expected. Technological innovations, for instance, are frequently adopted at a later date than the net present value of investment suggests. This can be explained by a model of “investment under uncertainty,” which consistently accounts for uncertainty, sunk costs, and the flexibility of investment timing. Its essential conclusion is that, due to temporal opportunity costs, critical incremental cash flows that trigger investments might be higher than those needed for simple cost recovery. This accounts for an ostensible reluctance to invest (economic hysteresis). In this article, we demonstrate how slow conversion to organic farming in general, and the different rates of conversion in Germany and Austria in particular, can be explained by the new investment theory.     

基于实物期权的水利工程投资柔性决策研究

针对水利工程投资的风险性、不确定性等特点，应用实物期权的理论与方法，研究不确定条件下的水利工程投资决策中的项目柔性问题。以大型输水工程为例，建立基于实物期权的输水工程投资的柔性决策模型，并通过数值结果综合分析各个不确定条件因素对项目柔性以及投资决策的影响，为水利工程投资方案的决策提供了一个新思路和方法。     

Are short rotation coppices an economically interesting form of land use? A real options analysis

Short rotation coppice (SRC) is intensively discussed as being an economical and ecological advantageous alternative to traditional agricultural land use. In various countries, farmers have been encouraged through incentives to cultivate SRC. Nevertheless, they often do not switch from conventional land use to SRC, even if SRC is relatively beneficial according to the net present value (NPV) rule. Therefore, farmers do not follow the classical investment theory. A relatively new theory is the real options approach (ROA). The ROA takes further aspects like irreversibility of the investment costs, flexibility regarding investment timing, and uncertainty of the investment returns into account, which the NPV rule ignores. In the case of SRC, investment (conversion) triggers when a farmer should switch to SRC following the ROA can be higher than those following the NPV rule. As it is often the case in real options applications, decision makers’ possibility to disinvest in general and farmers’ possibility to reconvert, in particular within the useful lifetime of SRC, is not considered. We build a model to calculate the conversion triggers for switching from annual crop production to SRC following the ROA. We consider the opportunity to reconvert the land and evaluate the respective effects on the conversion triggers according to the ROA. Furthermore, we analyze the effect of a former governmental incentive, in terms of an investment subsidy, on the conversion triggers of both theories. Our calculations show that following the ROA, a farmer should change land use to SRC more slowly than when following the NPV rule. Furthermore, neglecting the reconversion possibility would cause considerable bias amongst the results. The consideration of investment subsidies diminishes the conversion triggers of both theories. We conclude that the ROA can at least partially explain farmers’ inertia of converting to SRC.     

A model of entry–exit decisions and capacity choice under demand uncertainty

Many investment decisions of agribusiness firms, such as when to invest in an emerging market or whether to expand the capacity of the firm, involve irreversible investment and uncertainty about demand, cost or competition. This paper uses an option‐value model to examine the factors affecting an agribusiness firm's decision whether and how much to invest in an emerging market under demand uncertainty. Demand uncertainty and irreversibility of investment make investment less desirable than the net present value (NPV) rule indicates. The inactive firm is more reluctant to enter the market when it takes into account demand uncertainty because it preserves the opportunity of making a better investment later. The active firm is more reluctant to abandon the investment because there is an option value of keeping the operation alive. There is a greater distance between the entry and exit thresholds under the option‐value approach than under the NPV rule due to demand uncertainty. The results have implications for agribusiness decision‐making.     

Uncertain Land Availability and Investment Decisions: The Case of Dutch Dairy Farms

Within the EU, uncertainty about the possibility of acquiring land can be quite significant for individual farmers in sectors like dairy farming. Farm‐level investment decisions are commonly made ex‐ante, when the farmer is not certain about the possibility of purchasing land. This possibility is realised only in a future period. In this paper, we have developed and applied a simple two‐period model in which a profit‐maximising farmer, facing uncertainty about the possibility of acquiring land, has to choose the optimal mix of capital (buildings) investment and land endowment. We illustrate the model using data from Dutch dairy farms.     

Investing in Perennial Pasture Improvement: A Real Options Analysis

In investment analysis, uncertainty and irreversibility can undermine net present value (NPV) as a decision rule since the option to delay investment may have value. We apply the real option theory of investment to the pasture investment decision facing livestock producers in southwest Western Australia. In 2006, livestock producers thinned their herds as pasture availability dwindled due to extreme drought conditions. This left producers with a unique opportunity to either establish new perennial pastures for their cattle or utilize volunteer annual pasture and invest in more sheep breeders. In either case, large and irreversible investments fraught with multiple sources of uncertainty implies that one can gain useful insights by casting the investment problem in a real option context. The results suggest that required rates of return for each investment alternative are about 1% to 1.5% higher than standard NPV would suggest with sheep production having the lower required rate of return.     

Investment in site-specific crop management under uncertainty: implications for nitrogen pollution control and environmental policy

This paper applies an option‐pricing model to analyze the impact of uncertainty about output prices and expectations of declining fixed costs on the optimal timing of investment in site‐specific crop management (SSCM). It also analyzes the extent to which the level of spatial variability in soil conditions can mitigate the value of waiting to invest in SSCM and influence the optimal timing of adoption and create a preference for custom hiring rather than owner purchase of equipment. Numerical simulations show that while the net present value (NPV) rule predicts that immediate adoption is profitable under most of the soil conditions considered here, recognition of the option value of investment indicates that it is preferable to delay investment in SSCM for at least 3 years unless average soil quality is high and the variability in soil quality and fertility is high. The use of the option value approach reveals that the value of waiting to invest in SSCM raises the cost‐share subsidy rates required to induce immediate adoption above the levels indicated by the NPV rule.     

A Real Options Approach for the Investment Decisions of a Farm‐Based Anaerobic Digester

The profitability of anaerobic digesters (ADs) for Ontario dairy farmers are examined using real options under current and proposed government pricing policies and investment uncertainty. In the case of a renewable energy initiative such as an AD with large sunk costs and volatile returns, the value of deferring investment may be significant enough to offset the returns suggested by the net present value (NPV) approach. For a 150 cow herd, net revenues should be approximately $1.1 million before the AD is installed using the real options approach as compared to $0.5 million with the NPV approach. An AD is close to generating a positive NPV for a 600 cow herd if for either a 1% increase in the electrical price or decrease in the cost. However, farmers need not invest today and there is a value to delaying this decision from potential improvements in the technology that increase the efficiency and/or decrease operating costs of the AD. The real options analysis indicates that this option to delay investment has a value of approximately $300,000 for a typical Ontario dairy farm. Thus, either significant grant funding or higher feed‐in‐tariff rates are required to induce the increased adoption of AD technology in Ontario today even for the largest of dairy farms. Considering the probability of government support potentially ending, increases the value of investing today but a significant option value to defer still exists.     

Irreversible Investment Under Uncertainty: Conservation Easements and the Option to Develop Agricultural Land

A landowner's decision to convert farmland to urban use is presented as an irreversible investment under uncertainty. This approach improves on conventional approaches to the valuation of conservation easements by incorporating option values. This approach also refines the calculation of compensation potentially due to landowners when use of their land is restricted by government policies to protect the environment.     

Environmental Policy Uncertainty and Marketable Permit Systems: The Dutch Phosphate Quota Program

Tradable permits are generally considered as an efficient instrument to regulate pollution by individual producers. However, uncertainty about changes in or possible discontinuation of the program could make individual farmers reluctant to invest in tradable permits. This article uses the option approach to derive a theoretical model that shows the impact of policy uncertainty on investment in tradable quota. The empirical assessment provides weak evidence for the existence of option values due to policy uncertainty for phosphate quota in swine production in the Netherlands.     

Forestry in the Republic of Ireland: Government policy,grant incentives and carbon sequestration value

Recent decades have seen a rapid increase in the area of privately owned forest plantations in Ireland. This has been largely driven by grant aid and annual premium payments from the government and the European Union. These forests are significant carbon sinks and as such are delivering added benefit to the country by contributing to greenhouse gas reductions under the Kyoto Protocol.The direct impact of government subvention on the net present value (NPV) for a defined forestry plantation is investigated. The added value of carbon sequestration to forestry investment is also examined using the Forestry Commission (Great Britain) carbon model. Extending the typical assumption of a constant carbon price for project appraisal purposes, this paper allows carbon prices to evolve randomly according to a flexible stochastic price process. The model chosen is an extended mean-reverting jump-diffusion with the flexibility to capture the higher order statistical features (i.e. skewness and kurtosis) of the carbon markets. This allows for an analysis of the risk and uncertainty around the NPV from exposure to stochastic carbon prices. It is shown that government grants and annual premiums for afforestation significantly improve the NPV on forestry investment. Carbon sequestration is shown to add further value.     

International capital markets and open‐economy macroeconomics

Abstract

The standard open‐economy model on which the Bretton Woods macroeconomics is based takes into account neither the systemically fragmented nature of international capital markets nor the institutional relationship between savings and investment in semi‐industrial economies. This paper suggests that a more realistic approach to these structural features, possibly along the lines suggested by recent “new‐Keynesian” theories of market failure, would yield a model of macroeconomic behaviour which emphasizes investor uncertainty and vulnerability to external shock. The policy implications have interesting parallels with Keynes's own views on stabilization.     

Evaluating Agricultural Energy Policies Under Uncertainty: The Case of Electricity in South India

Farmers' attitude towards risk associated with the availability of energy inputs will influence their investment behavior and demand for energy inputs. In order to analyze policies that reduce the risk in energy availability, some modifications in methods are required. This study, using a mean-variance framework, demonstrates how cross-sectional data and time-series data on crop yields and prices can be used to analyze agricultural energy policies under uncertainty in a developing country context. It is argued that the farmers risk attitudes, their crop allocation behavior, changes in the demand for energy inputs and the stochastic relationship between various forms of energy inputs can be explained by the various energy constraints faced by them. Furthermore, using the same methods the impact of policies which affect these constraints, can be analyzed.     

Passive farming and land development: A real options approach

The EU's farmers are no longer required to produce commodities to receive direct payments as long as they keep their land in good condition. Some believe this is bad for development because it encourages passive farming. We evaluate, using a real options approach, the implications of decoupled payments for the desirability and optimal timing of agricultural land development when considering sunk investment costs and uncertain future returns. We find that decoupled payments accelerate development while passive farming increases, by adding managerial flexibility, the value associated with land. We then use the Nash bargaining solution to identify the rental share to be paid for leasing land. We show that a deal for the lease of land can always be reached, but that the facility to use passive farming as an outside option allows landowners to extract policy rents, thereby undermining the potential for the Basic Payment Scheme to support tenant farmers’ incomes.     

Management flexibility,price uncertainty and the adoption of carbon forestry

A price on carbon has the potential to drive significant land use change through reforestation. Understanding the likely locations and extent of these changes is therefore a key focus for researchers and policy makers. Models of reforestation based on net present values (NPV) typically compare the economic returns of carbon forestry to alternative land uses. However, these models often neglect the impact of uncertainty. Two sources of uncertainty highly relevant to carbon forestry are the opportunity cost of the land on which the trees are established (i.e. future returns from alternative land uses) and carbon prices. In addition to foregoing the current land use, a landowner making a permanent land use change such as carbon forestry is also giving up the opportunity to change management in the future, for example by changing crop mix in response to commodity price changes. We develop a Monte Carlo model to demonstrate the value of management flexibility, based on a case study property in Australia. While in the absence of management flexibility carbon forestry is more profitable than the current land use, under uncertain future commodity prices it is less attractive to a landowner. We go on to show that, even if the returns from carbon exceed those from more flexible agricultural land use, uncertainty over future carbon prices is likely to delay the adoption of carbon forestry. Overall the models presented in this paper demonstrate that the adoption of carbon forestry is likely to be substantially lower, and slower, than models based on static values would suggest.     

Investment Under Uncertainty and Dynamic Adjustment in the Finnish Pork Industry

A stochastic dual model of investment under uncertainty is used to investigate structural adjustment in the Finnish hog industry. Value function restrictions are found to be comparable to those in existing dual models assuming deterministic state variables. The model also allows for an asymmetry in investment response during capital expansion and contraction phases. Empirical results show that investments respond negatively to increased uncertainty and that labor adjusts more slowly during contraction phases than during expansions. Results on economies of size, uncertainty effects, and adjustment rigidities have important implications for hog industry response to Finland's entry into the EU.     

Investment decision-making under economic policy uncertainty

It is widely established that economic policy uncertainty (EPU) affects investment decisions and performance, yet research in this area has overlooked the direct property investment market. This article seeks to rectify this and proposes a multistage multilevel analytical framework to offer new insights and a richness of findings. Using a news-based measure of EPU in the United Kingdom, and controlling for economic conditions, a national-level analysis reveals some evidence of Granger-Causality between EPU and total returns, indicating that pricing is responsive to uncertainty. These findings suggest that EPU is an important risk factor for direct property investments, with pricing implications. Differences in data and performance measure are important, however, with income returns unresponsive. A micro-level investigation begins to reveal some of the asset-pricing decisions underpinning the national results, indicating investors’ concerns for income streams are consistently high, regardless of varying EPU. Pricing can also cause changes in EPU, such as in the retail and industrial markets (increasingly linked through logistics) reflecting sector-specific stakeholder groups and newsworthy issues. This evidence highlights how important it is for policy-makers to understand the complex and bi-directional relationship, that indecision can undermine investment confidence and cause investment market volatility, in turn raising EPU.     

略论我国矿业海外投资项目的风险评价

我国企业走出去投资开发国外的矿产资源是以具体的投资项目为依托的.在对投资项目进行经济评价时,就应重视其中的风险分析,通过风险因素识别对风险发生的概率进行估计,在此基础上运用模糊综合评价的方法再对风险进行综合评价,估算风险发生的可能性及其后果的大小,以减少项目计量上的不确定性,以利于做出投资决策.     

供水企业投资风险分析与控制

针对供水企业投资存在着实际销售水量、预期水价实现程度以及坏账损失程度的不确定性，提出对投资风险因素的预测和选择合理的风险处理手段，供水企业投资风险的转移，实施风险共担和风险内部化策略等。把供水企业投资的风险降低到最低程度，以保证项目投资收益的最大化。即销售水量盈亏平衡计算。     

New plant engineering techniques,R&D investment and international trade

New plant engineering techniques (NPETs) may significantly improve both production and quality of foods. Some consumers and regulators around the world might be reluctant to accept such products and the global market penetration of these products may remain low. We develop a parsimonious economic model for R&D investment in food innovations to identify conditions under which NPET technology emerges in the context of international trade. The framework integrates consumers' willingness to pay (WTP) for the new food, the uncertainty of R&D processes, the associated regulatory cost of approval, and the competition between domestic and foreign products. With generic applicability, the model enables the quantitative analysis of new foods that could be introduced in markets and then traded across borders. We apply the framework to a hypothetical case of apples improved with NPETs. Simulation results suggest that import bans and high values of sunk cost can reduce R&D investment in NPETs to suboptimal levels.