A real options analysis of coffee planting in Vietnam

Vietnam grew from an insignificant to the world's second largest coffee producer during the 1990s. To understand this growth, this article examines Vietnamese coffee growers' investment decisions using real options theory. The study finds that producers, with variable costs of 19 cents/lb and total cost of 29.3 cents/lb, would enter coffee production at a coffee price of 47 cents/lb and exit at a coffee price of 14 cents/lb. Most Vietnamese growers appear to be sufficiently efficient to continue producing coffee even at relatively depressed price levels.     

Capital market imperfections in economic transition: empirical evidence from Ukrainian agriculture

This article investigates the link between financing and investment in Ukrainian agriculture during economic transition. The main contribution of the study is to provide empirical evidence for the coexistence of financial constraints and soft budget constraints (SBCs). This is of particular importance because credit constraints and SBCs have completely different economic effects. The lack of differentiation between these forms of capital market imperfections yields overlapping effects of financing on investment and may therefore cause a misinterpretation of econometric results. Our empirical analyses are based on an econometric estimation of the Euler investment equations for 529 large farms from three Ukrainian regions between 2001 and 2005. The results confirm that financial variables significantly influence farms' investment, providing empirical evidence of an imperfect capital market in Ukrainian agriculture. It turns out that credit constraints in the Ukrainian agricultural sector are more important than SBCs. We show that the estimated level of financial constraints for profitable farms with access to loans is higher if both types of capital market imperfections are appropriately distinguished.     

Technological change and risk management: an application to the economics of corn production

The paper investigates the linkages between technological change and production risk, with an application to corn. The effects of technology on risk exposure are analyzed. We define technological progress to be risk‐increasing (risk‐decreasing) if it increases (decreases) the relative risk premium. The analysis is applied to panel data from Wisconsin research stations. Conditional moments (including mean, variance and skewness) of corn yield, grain moisture and corn profit are estimated for different sites. We investigate how the trade‐off between expected return and the risk premium varies over time and over space. The empirical results indicate that technological progress contributes to reducing the exposure to risk as well as downside risk in corn production, although this effect varies across sites. They also stress the role of the relative maturity of corn hybrids as a means of managing risk.     

Irrigation technology adoption and its implication for water conservation in the Texas High Plains: a real options approach

Water shortage has been a significant issue for several decades in the Texas High Plains. Agriculture has been identified as the main activity contributing to this shortage. To address this issue, many efforts have been focused on the possible adoption of sophisticated irrigation systems with high levels of water application efficiency. In this study, the entry and exit thresholds for the low‐energy precision application (LEPA) system are analyzed simultaneously in cotton farming in the Texas High Plains using a real options approach. The results show that the LEPA system is profitable only when cotton price is set above $1.59/kg. The exit (entry) threshold is consistently low (high) over a range of values for parameter changes including investment cost, exit cost, variable cost, risk‐adjusted discount rate, and volatility rate, so it is unlikely that farmers with irrigation systems in place would leave them easily. This implies that to attain the goal of saving water, Lubbock County needs to focus on convincing current farmers to replace old irrigation systems with new ones.     

Investment Spikes in Dutch Greenhouse Horticulture

The presence of investment cycles demonstrates the long‐run policy of firms investing in particular periods (investment spikes) with lower or zero investment levels in between, which contradicts the smooth pattern predicted by a convex adjustment model. This paper investigates the spells between investment spikes in a discrete‐time proportional hazard framework to estimate the probability of observing lumpy investment and factors underlying lumpy and intermittent patterns of investment. Duration models were estimated on two datasets: on an unbalanced panel and on average data of 10 ‘firm size’ groups of Dutch greenhouse firms over the period 1975–1999. Two specifications of the model were estimated: one includes only theoretically grounded variables, and the other specification is extended by empirically grounded variables. Theoretically based models can explain the occurrence of investment spikes. Both specifications of model show an investment cycle of six years. This is also confirmed for the average firm, which exhibits a higher hazard ratio in the 6th, 12–13th and 21st years of duration.     

Linkages between the farm and nonfarm sectors at the household level in rural Ghana: a consistent stochastic distance function approach

This article explores the effects within households of an expanding rural nonfarm (RNF) sector in Ghana. We ask whether the growing RNF sector allows for economies of diversification within farms, how it affects household input demands, and whether it has measurable effects in overall household production efficiency. We explore the intrahousehold linkages between agricultural and RNF activities, first assuming perfectly competitive input and output markets and then with market failures, in particular missing labor and credit markets. We then measure these linkages using a household level input distance function, finding high levels of inefficiency in Ghanaian farms. Also, there are cost-complementarities between the RNF sector and the agricultural sector, particularly with food crops in which the poorest tend to specialize. The expansion of the RNF sector increases demand for most inputs including agricultural land. Finally, we show that smaller farms tend to be more efficient, and that RNF output is helping the farm household to become more efficient, but the latter result is not robust.     

An economic approach to soil fertility management for wheat production in north-eastern Australia

Soil fertility decline and soil management for crop production are important economic issues for grain growers in north-eastern Australia. In that region, there is evidence of soil fertility decline which is attributed to past crop management practices. The questions addressed in this article are first, whether components of soil fertility can be improved by better management and second, by how much soil fertility would change. Soil fertility for crop production is considered in terms of soil organic carbon and nitrogen. A stochastic dynamic economic analysis of soil fertility management for wheat production is presented. A sequential analysis of first deriving the optimal nitrogen stock and application rates is followed by an assessment of tillage, stubble, and fertilizer strategies to obtain an optimal level of soil organic carbon. The recommended management practices are consistent with emerging management trends in the region. The derivation of optimal levels of soil fertility for agricultural purposes has other policy implications, which we discuss.     

Hired labor use decisions in cassava-producing households of sub-Saharan Africa

Sub‐Saharan Africa is the only developing region of the world where agricultural output has been trailing population growth for most of the last three decades. Farming systems in the region are inherently risky because they are fundamentally dependent on the vagaries of weather. In addition, it is a region of crises; poverty, civil strife, and HIV/AIDS. Attention must therefore be focused on improving the production of crops that could thrive under these circumstances. Because of its tolerance of extreme drought and low input use conditions, cassava is perhaps the best candidate in this regard. And cassava is a basic food staple and a major source of farm income for the people of the region. The use of hired labor is important for its production growth because cassava root yield responds positively to the application of hired labor. This article, based on farm‐level information collected from six major cassava‐producing countries of Africa, within the framework of the Collaborative Study of Cassava in Africa, identifies strategic variables affecting the hired labor use decisions of producing households. The characteristics of the household head (age and number of years of formal education), the size of the household farm, good market access, and population pressure are found to motivate households to apply hired labor in cassava production. These observations underscore the need for investing in people—education—and in infrastructure—market access—as possible tools for improving food production in the region. The positive effect of farm size also suggests that some kind of land reform, which would put more farmland at the disposal of farm households, could be favorable to improving cassava production.     

Investment in soil conservation in northern Ethiopia: the role of land tenure security and public programs

A double hurdle statistical analysis of 250 farms in the Tigray region of Ethiopia reveals different causal factors for soil conservation adoption versus intensity of use. Farmers' reasons for adopting soil conservation measures vary sharply between stone terraces and soil bunds. Long‐term investments in stone terraces were associated with secure land tenure, labour availability, proximity to the farmstead and learning opportunities via the existence of local food‐for‐work (FFW) projects. By contrast, short‐term investments in soil bunds were strongly linked to insecure land tenure and the absence of local food‐for‐work projects. Public conservation campaigns on private plots reduced adoption of both stone terraces and soil bunds. Whereas capacity factors largely influenced the adoption decision, expected returns carried more influence for the intensity of stone terrace adoption (measured as metres of terrace per hectare). More stone terracing was built where fertile but erodible silty soils in higher rainfall areas offered valuable yield benefits. Intensity of terracing was also greater in remote villages where limited off‐farm employment opportunities reduced construction costs. These results highlight the importance of the right kind of public interventions. Direct public involvement in constructing soil conservation structures on private lands appears to undermine incentives for private conservation investments. When done on public lands, however, public conservation activities may encourage private soil conservation by example. Secure land tenure rights clearly reinforce private incentives to make long‐term investments in soil conservation.     

An inverse demand analysis with introduction of quality effects: an application to Spanish consumption of fruit and vegetables

This article analyzes consumer preference for fruit and vegetables when, by using time series with socioeconomic characteristics of households, there can be seemingly unobserved quality effects, which are increased by aggregation. The changes in Spanish demand for fresh and processed fruit and vegetables over the period 1987–2000 are discussed. Following previous tests and analyses, quantities are taken as predetermined and prices as matching the offer conditions. Thus, quality effects (based on the nutritional and/or health value of the product) are estimated from the error terms associated with the functions of the unit values. Quality variables are introduced as taste shifters in the inverse demand system (Laitinen–Theil model). The results show the positive effects of quality differences on the normalized price for the group of products through own‐quality flexibilities, and the negative effects between fresh and processed products through cross‐quality flexibilities.     

Differences in agricultural returns: an empirical test of efficiency in factor input allocation using Vietnamese data

We study whether rural households in Vietnam allocate their factor inputs efficiently. Factor returns and technical rates of substitution (TRS) between production activities are compared. We estimate two translog production functions and conduct three tests: First we test the equality of bootstrapped returns. Second, we use a bootstrapped t -test comparing the equality of TRS. Finally, we derive a set of nonlinear restrictions on our estimated parameters, which, if held, would imply that we cannot reject efficiency. The article concentrates on the allocation of factors between the cultivation of the two most important agricultural crops—sugar cane and rice. We cannot reject the possibility that households are efficient in their input allocation. These results are consistent and stable over different estimation techniques and support the assumption of profit maximization.     

Demand for cigarettes revisited: an application of the threshold regression model

Recent estimates of the income elasticity of cigarette demand have pointed to a disturbing result: a nearly zero or sometimes negative income elasticity. In order to explore the nonlinearity embedded in the cigarette demand structure, we employ a four‐regime panel model (dynamic fixed effect) to estimate the cigarette demand function in the United States. The results indicate that income elasticity is (i) positively significant for the income level less than 8,568 US$, (ii) positive but statistically insignificant for the income greater than 18,196 US$, and (iii) negatively significant for the income range between 8,568 and 18,196 US$. In addition, we find that the price elasticity assumes the greatest absolute value for the income level in excess of 18,196 US$, but becomes most inelastic for the income level between 11,129 and 18,196 US$.     

Evaluating the impact of agricultural extension on farms' performance in Crete: a nonneutral stochastic frontier approach

This article attempts to integrate the production‐ and the efficiency‐based approaches for evaluating the impact of extension on farms' performance. For this purpose the nonneutral production frontier model is used, and the empirical analysis refers to a sample of farms from Crete, Greece. The empirical results support the proposed formulation instead of either the production‐ or the efficiency‐based formulations as extension was found to have a statistically significant effect on closing both the technology and management gaps. Public and private extension services were found to be competitive in the production function and complementary in the technical inefficiency effect function. In addition, farms using both public and private extension services achieved a higher degree of technical efficiency than those using either public or private extension services, and farms with no extension services were found to be the least efficient.     

Regional obesity determinants in the United States: a model of myopic addictive behavior in food consumption

Obesity is considered one of the largest public health problems in the United States today. The premise for our study is a body of results from medical research showing that sweetened foods, i.e., an increased consumption of sugars, leads first to sugar addiction and second to carbohydrate addiction and increased consumption of fats. The latter feature is actually responsible for the increase in body mass index (BMI), but the trigger that produces cravings for extra calories is sugar and sweeteners. Based on our results, a myopic model of addictive behavior in food consumption seems to capture the food consuming habits and related outbreak of obesity among the American population. Our results indicate that lower current and past real prices of sugar contribute significantly to higher values of BMI, and increase the likelihood of becoming obese in the United States.     

Technology and efficiency in a panel of Italian dairy farms: an SGM restricted cost function approach

This article employs a short‐term specification of the symmetric generalised McFadden (SGM) cost function capable of accommodating quasi‐fixed factors and variable returns. Temporary equilibrium and scale economies are investigated while maintaining the consistency of the estimated model with microeconomic theory and approximation properties. It also makes use of a two‐step procedure to estimate first the technology parameters and then time‐varying efficiency at farm level. No distributional assumptions are required on efficiency as we consider a fixed effect model. A balanced panel of Italian dairy farms during the years from 1980 to 1992 serves as the case study. The results suggest a rigid productive structure during the pre‐ and post‐quota period. Moreover, Italian milk producers are found to exhibit considerable excess capacity and rather low input technical efficiency.     

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.