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.     

Estimating Investment Rigidity within a Threshold Regression Framework: The Case of U.S. Hog Production Sector

This article addresses the issues of investment/disinvestment asymmetry and a possible existence of a sluggish regime in the demand for a quasi-fixed input in the U.S. hog production sector. Adopting a new threshold estimation procedure, quarterly data from 1970 through 2002 are used to estimate a regime-dependent investment demand equation for a quasi-fixed input, taking sows as a proxy. The results support the existence of three regimes over alternative specifications precluding the sluggish regime, confirming the existence of asset fixity in hog production. The results also highlight the importance of accounting for investment rigidity when estimating hog supply and variable input demands.     

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.     

OPTIMAL BUFFER STOCK POLICIES FOR WHEAT AT THE WORLD LEVEL

Alternative wheat storage policies which maximise the expected present value of returns for consumers, producers, a monopoly storage agency and society as a whole are derived using a dynamic programming model. Results are compared with those from an earlier simulation model, and are found to justify higher investment in storage capacity compared with that suggested by the simulation model. The model is extended to derive optimal storage policies if production follows a stochastic cobweb process.     

Dynamics of Agricultural Technology Adoption: Age Structure, Reversibility, and Uncertainty

We develop a dynamic model of technology adoption that generalizes previous literature by incorporating technology age, reversible investment, variable inputs and outputs, and stochastic prices. The model is calibrated for irrigated cotton production in California. Optimal investment exhibits a significant vintage capital effect which provides a new candidate explanation for delayed technology diffusion. We show that the hurdle rate derived by option value models can be partially explained by the assumption of irreversible investment, and simulations demonstrate this assumption has regional policy relevance. Uncertainty affects optimal investment but has a declining effect with technology age.     

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.     

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.     

Investment planning under uncertainty and flexibility: the case of a purchasable sales contract*

Investment decisions are not only characterised by irreversibility and uncertainty but also by flexibility with regard to the timing of the investment. This paper describes how stochastic simulation can be successfully integrated into a backward recursive programming approach in the context of flexible investment planning. We apply this hybrid approach to a marketing question from primary production which can be viewed as an investment problem: should grain farmers purchase sales contracts which guarantee fixed product prices over the next 10 years? The model results support the conclusion from dynamic investment theory that it is essential to take simultaneously account of uncertainty and flexibility.     

The importance of seasonal variability and tactical responses to risk on estimating the economic benefits of integrated weed management

Seasonal variability is an important source of risk faced by farmers and, regardless of an individual's attitude to risk, there are options to tactically adjust production strategies as the outcomes of risk become known. The objective of this article is to measure the economic benefits of alternative approaches to managing weeds, one of the most serious production problems in Australian cropping systems. A bioeconomic model that combines weed biology, crop growth and economics is developed to value the effects of seasonal variability and the role of tactical responses and sequential decision making in determining an optimal integrated weed management strategy. This shows that there are substantial differences in the measured long‐term benefits from deterministic and stochastic simulations. It is concluded that, for research evaluation of technologies that involve complex biological and dynamic systems, ignoring the impacts of seasonal variability, responses to risk and sequential decision making can lead to an incorrect estimate of the economic benefits of a technology. In this case study of optimal weed management strategies in Australia, the size of the error is high.     

Pigs in Space: Modeling the Spatial Structure of Hog Production in Traditional and Nontraditional Production Regions

We posit a spatially explicit, county-level model of the hog production sector and estimate how numerous firm-specific, locality-specific, and spatial agglomeration factors affect the location, movement, and intensity of hog production within 15 key hog production states. Spatial agglomeration, urban encroachment, input availability, firm productivity, local economy, slaughter access, and regulatory stringency variables affect the sample regions' spatial organization. Analyses suggest that western states in the sample may shape hog production levels by wielding traditional business recruitment and retention tools (e.g., tax rates, environmental stringency) while Corn Belt states may shape hog production via nontraditional tools (e.g., land use controls).     

THE ECONOMIC ADVANTAGE OF LONGEVITY IN THE DAIRY COW

An adaptive stochastic dynamic programming model is described which solves the optimum replacement decision problem for the dairy cow under physical and financial assumptions currently typical for the UK. By expressing the expected net present value of the replacement heifer as an annuity equivalent under various assumptions with and without enforced (involuntary) culling an estimate of the value of longevity was obtained and an assessment made of its sensitivity to key assumptions. Increased longevity added about $20 per extra lactation per year on to the investment potential of the replacement dairy heifer under the assumptions made. This figure is sensitive to replacement cost, but could be used to provide economic values for longevity as part of an economic breeding objective for dairy cattle in the UK.     

退耕还林背景下桑蚕茧技术效率及生产弹性分析

在退耕还林工程和东桑西移工程的背景下,运用超越对数函数的随机前沿分析方法,测量桑蚕茧的技术效率及生产弹性,研究结果表明:2003～2008年桑蚕茧的平均技术效率呈现下降的趋势,各桑蚕茧主产区都存在一定程度的技术效率水平缺失;自然灾害能显著降低蚕茧的技术效率,农村居民生产性固定资产投资能有效提高技术效率水平;中西部单位面积桑蚕的劳动力投入出现过剩局面,单位面积桑蚕茧吸纳农村剩余劳动力能力有限。因此应在优化蚕桑业区域结构的同时,加快西部地区的技术推广和技术创新,加大固定资产的投入,提高桑蚕茧的技术效率;并调控单位面积桑蚕茧的劳动投入量,扩大退耕栽桑的面积,提高桑蚕茧生产的劳动效率。     

Nonlinear adjustments in deviations from the law of one price for wholesale hog prices

This article applies the Band‐Threshold Autoregression (Band‐TAR) model to investigate whether the law of one price (LOOP) holds in Taiwanese wholesale hog markets during the period from May 1987 through December 2003. We find evidence of a nonlinear mean reversion in deviations from the LOOP for relative hog prices. Our empirical study confirms the presence of thresholds and provides strong evidence in support of the view that the regional hog markets have been tightly integrated in Taiwan and that the wholesale hog market in Taiwan is an efficient market economy. Furthermore, the estimated half‐lives from the nonlinear generalized impulse response analysis are as short as four months.     

Risk Preferences of Dairy and Hog Producer in Quebec

The objective of this study is to investigate the nature of risk preferences of Quebec dairy and hog producers. The direct elicitation of utility method is employed to determine producers'degree of risk aversion. The Delphi process is used to obtain more refined and realistic responses. The results reveal that the risk preferences of the randomly selected Quebec farmers are highly diverse. The percentage of risk-taking farmers ranges from 8% to 23% depending upon the level of investment and the nature of the enterprise. On average, the majority of farmers in both groups are found to be risk averse. Based on the differences between the means as well as distributions, although not significant in all cases, hog producers are found to be consistently more risk averse than dairy producers. Moreover, the gap between the two groups widens as the level of investment increases. The implications of this result are that the stability of farm income due to supply management in dairy sector may facilitate investments of a given risk (for example, adoption of a new technology) more so than it would in the hog sector.     

O‐Ring production on U.S. hog farms: joint choices of farm size,technology, and compensation

We hypothesize that hog production can be characterized by complementarities between new technologies, worker skills, and farms size. Such production processes are consistent with Kremer's O‐ring production theory in which a single mistake in any one of several complementary tasks in a firm's production process can lead to catastrophic failure of the product's value. In hog production, mistakes that introduce disease or pathogens into the production facility can cause a total loss of the herd. Consistent with predictions derived from the O‐ring theory, we provide evidence that the most skilled workers concentrate in the largest and most technologically advanced farms and are paid more than comparable workers on smaller farms. These findings suggest that worker skills, new technologies, and farm size are complements in production. The complementarities create returns to scale to large hog confinements, consistent with the dramatic increase in market share of very large farms over the past 20 years.     

How much do farmers value their independence?

A farmer's decision to contract or produce independently depends on the distribution of income and the nonpecuniary attributes associated with both business arrangements. The benefits to growers from contracting (such as risk reduction) may be overestimated if the nonpecuniary benefits enjoyed by independent producers (such as the right to make management decisions and own the commodity produced) are not accounted for. This study uses data from a U.S. national survey of hog producers to estimate (1) the difference in expected net returns between contracting and independent production, (2) the premium a representative farmer would pay for the risk reduction provided by a contract, and (3) the premium a farmer would pay for the nonpecuniary benefits associated with independent production. Results indicate that growers have a strong preference for autonomy—with moderately risk‐averse growers being willing to pay more for the attributes of independent production than they would for the risk‐reducing benefits of a contract.     

Land speculation and interest rate subsidies as a cause of deforestation: The role of cattle ranching in Costa Rica

Land speculation by cattle ranchers is considered a principal cause of deforestation in Latin America, in particular in combination with (previously) widely provided interest rate subsidies. Proof for the hypothesis that land speculation leads to inflated rates of investment in land is, however, relatively limited and invariably related to the question of whether land prices tend to rise over time. Based on the Neoclassical investment theory with adjustment costs we develop a stochastic cattle ranching model in which land prices are modelled as geometric Brownian motion, to evaluate the effect of expected fluctuations in land prices on land investment decisions by cattle ranchers in Latin America. For a case study in the Atlantic Zone of Costa Rica, results show that the expected rate of investment is almost 35% underestimated in case land prices are assumed constant instead of fluctuating according to the standard deviation, while abolition of interest rate subsidies leads to an almost 15% decrease in the expected rate of investment. Consequently, it is shown that variability in land prices alone is a sufficient condition for land speculation, inflated rates of investment in land, larger farm sizes and, thus, higher rates of deforestation in agrarian frontier areas, while this process is further promoted by subsidized livestock credit or any other form of agricultural subsidy that increases the marginal production value of land.     

Exploring Farm Investment Behaviour in Transition: The Case of Russian Agriculture

This paper analyses the investment behaviour of Russian farms during the period of economic stabilisation that followed Russia’s financial crisis of 1998, and is the first to apply the error‐correction investment model to describe farms’ investment behaviour in the transitional context. Additionally, the paper employs the error‐correction and the adjustment‐cost model to test for differences in the investment behaviour between various farm categories. The results show that in general Russian farms exhibited an error‐correcting behaviour in the period under investigation. From 1999 to 2005 the output–capital gap was closed by an average rate of 10% per year. Estimates of the adjustment‐cost model show that Russian farm investments are very sensitive to the sales–capital ratio, suggesting that Russian farms exhibit increasing returns to scale and positive expectations about future revenues. Yet, such farm characteristics as ownership structure, access to input markets and also regional specifics were found to be decisive for farm investment not only in the short but long term too. Finally, the results show that the adjustment‐cost model is adequate for the evaluation of differences in short‐term investment behaviour, whereas it is noticeably less powerful for investigating differences in the farms’ long‐term investment behaviour.