Option Approach to Search for Threshold Rice Price Toward Sustainable Paddy Field Management

This paper applies an option approach to search for the threshold rice price toward the sustainable paddy field management under rice price stochasticity. Rice price is assumed to follow geometric Brownian motion. The management model for paddy fields is a discrete stochastic dynamic programming model with binomial approximation for geometric Brownian motion, where a control variable is a decision to sustain or terminate paddy yield management. Our computational experiments indicate that an increase in rice price volatility could lower the threshold rice price for farmers to continue rice production. It is also shown that depending on the degree of rice price volatility, even under a lower price level than production costs, maintaining the management could become beneficial. Considering an option to terminate production could make the higher expected value of rice production than without it. Using 12 sets of time series data on voluntarily marketed rice produced in Hokkaido, Aomori, Iwate, Miyagi, Akita, Yamagata, Fukui, Ibaragi, Chiba, Niigata, Toyama and Nagano, the minimum threshold rice price of 6,700 Yen/60 kg was found in Chiba with the largest volatility, and the maximum of 7,250 Yen/60 kg in Ibaragi with the smallest volatility. If the market price becomes lower than the threshold rice price, some policy measures would be necessary toward sustainable paddy field management by covering the difference between them.