THE REAL OPTIONS PUZZLE FOR MICHIGAN TART CHERRY PRODUCERS

Capital budgeting decisions faced by tart cherry producers often challenge our traditional valuation techniques. Real Options Valuation (ROV) methods may be useful but assumptions of existing ROV approaches are restrictive and, in some cases, unrealistic. In this paper we assert that use of existing option pricing methods can not be justified. Instead, dynamic programming approach is more appropriate. We develop a multi-period model and use it to obtain an optimal orchard replacement policy. The model is applied to an example farm from Northwestern Michigan and the results provide the following messages. First, flexibility options can be estimated for individual tart cherry producers using the DP approach albeit, indirectly. Second, a farmer who uses the DP approach to develop contingency optimal replacement rules will be better off than one who uses an ad hoc standard replacement rule. Third, if the SW climate scenario shifts to NW Michigan, tart cherry orchard values may fall substantially with implications on the future of tart cherry production in that region, unless compensating price increases follow.Farm Management,

How Can Micro-Level Household Information Make a Difference for Agricultural Policy Making: Selected Examples from the KAMPAP Survey of Smallholder Agriculture and Non Farm Activities for Selected Districts in Kenya

Agriculture forms the foundation of Kenya’s economy. However, the information base on agriculture % including basic indicators on farmers’ input, production, and marketing behavior, household food consumption patterns, etc. % is weak and largely outdated. Agricultural policy is largely made on the basis of conventional wisdom about the way things work. In a dynamic, evolving economy, long-standing perceptions may become increasingly inconsistent with current reality, particularly when the system has been exposed to dramatic changes such as structural adjustment, market liberalization, and the advent of new technology. In such a setting, entrenched perceptions about the way farmers, traders and consumers actually behave may lead to unintended and even counterproductive government policy. This paper aims to demonstrate how monitoring the rural economy through timely, periodic and reasonably representative household surveys can inform debate on existing and emerging policy issues.kenya, agricultural policy, food security, household, Agricultural and Food Policy, Food Security and Poverty, q12,

THE REAL OPTIONS PUZZLE FOR MICHIGAN TART CHERRY PRODUCERS

Capital budgeting decisions faced by tart cherry producers often challenge our traditional valuation techniques. Real Options Valuation (ROV) methods may be useful but assumptions of existing ROV approaches are restrictive and, in some cases, unrealistic. In this paper we assert that use of existing option pricing methods can not be justified. Instead, dynamic programming approach is more appropriate. We develop a multi-period model and use it to obtain an optimal orchard replacement policy. The model is applied to an example farm from Northwestern Michigan and the results provide the following messages. First, flexibility options can be estimated for individual tart cherry producers using the DP approach albeit, indirectly. Second, a farmer who uses the DP approach to develop contingency optimal replacement rules will be better off than one who uses an ad hoc standard replacement rule. Third, if the SW climate scenario shifts to NW Michigan, tart cherry orchard values may fall substantially with implications on the future of tart cherry production in that region, unless compensating price increases follow

Impact of debt structure on production efficiency and financial performance of Broadacre farms in Western Australia

Farming activities are often financed using debt, yet empirical studies investigating the relationship between farm debt structure and performance are still rare. Using a 10 year unbalanced panel of Broadacre farms in Western Australia, we relate the impact of long-term debt, short-term debt and tax liability on farm performance measured by input-oriented technical efficiency and return on assets. We find farm technical efficiency is positively related to short-term debt, tax liability and capital investment, but negatively related to off-farm income generating activities. Long-term debt has no effect on production efficiency and return on assets. These results are robust to both parametric and nonparametric methods of estimation

Dynamic Risk Management Under Credit Constraints

The vast majority of previous studies on farmers ’ optimal risk management behavior have used static models and on the most part ignored use of borrowing and lending as an alternative method of managing risk. In this paper we develop a stylized multi-period risk management model for a risk averse farmer who can use revenue insurance to manage risk and also borrow and lend subject to a credit constraint. The model is applied to an example farm from Adair County in Iowa and the results provide three important messages. First, contrary to the full coverage of actuarially fair insurance result expected from using purely static analysis, at low revenues, insurance coverage may not be taken in the absence of debt. Second, if debt is available, full coverage will be taken at all revenue states and, third, premium wedges at reasonable levels have larger impact on coverage if debt is available because they eliminate the incentive to use insurance. Results also show that use of borrowing and lending for consumption smoothing reduces extant risk by approximately 77 % while use of insurance only reduces risk by approximately 30%

DYNAMIC RISK MANAGEMENT UNDER CREDIT CONSTRAINTS

The vast majority of previous studies on farmers' optimal risk management behavior have used static models and on the most part ignored use of borrowing and lending as an alternative method of managing risk In this paper we develop a stylized multi-period risk management model for a risk averse farmer who can use revenue insurance to manage risk and also borrow and lend subject to a credit constraint. The model is applied to an example farm from Adair County in Iowa and the results provide three important messages. First, contrary to the full coverage of actuarially fair insurance result expected from using purely static analysis, at low revenues, insurance coverage may not be taken in the absence of debt. Second, if debt is available, full coverage will be taken at all revenue states and, third, premium wedges at reasonable levels have larger impact on coverage if debt is available because they eliminate the incentive to use insurance. Results also show that use of borrowing and lending for consumption smoothing reduces extant risk by approximately 77% while use of insurance only reduces risk by approximately 30%

How Can Micro-Level Household Information Make a Difference for Agricultural Policy Making: Selected Examples from the KAMPAP Survey of Smallholder Agriculture and Non Farm Activities for Selected Districts in Kenya

Agriculture forms the foundation of Kenya’s economy. However, the information base on agriculture % including basic indicators on farmers’ input, production, and marketing behavior, household food consumption patterns, etc. % is weak and largely outdated. Agricultural policy is largely made on the basis of conventional wisdom about the way things work. In a dynamic, evolving economy, long-standing perceptions may become increasingly inconsistent with current reality, particularly when the system has been exposed to dramatic changes such as structural adjustment, market liberalization, and the advent of new technology. In such a setting, entrenched perceptions about the way farmers, traders and consumers actually behave may lead to unintended and even counterproductive government policy. This paper aims to demonstrate how monitoring the rural economy through timely, periodic and reasonably representative household surveys can inform debate on existing and emerging policy issues

DYNAMIC RISK MANAGEMENT UNDER CREDIT CONSTRAINTS

The vast majority of previous studies on farmers' optimal risk management behavior have used static models and on the most part ignored use of borrowing and lending as an alternative method of managing risk In this paper we develop a stylized multi-period risk management model for a risk averse farmer who can use revenue insurance to manage risk and also borrow and lend subject to a credit constraint. The model is applied to an example farm from Adair County in Iowa and the results provide three important messages. First, contrary to the full coverage of actuarially fair insurance result expected from using purely static analysis, at low revenues, insurance coverage may not be taken in the absence of debt. Second, if debt is available, full coverage will be taken at all revenue states and, third, premium wedges at reasonable levels have larger impact on coverage if debt is available because they eliminate the incentive to use insurance. Results also show that use of borrowing and lending for consumption smoothing reduces extant risk by approximately 77% while use of insurance only reduces risk by approximately 30%.Risk and Uncertainty,