Investment behavior in agriculture - an analysis of the explanatory potential of the real options approach

Abstract

This study analyzes the explanatory potential of the real options approach (ROA) regarding the reluctance of Kazakhstani farmers to invest in modern dairy farming. More precisely, it compares the valuation of the ROA with that of the classical investment criterion such as the net present value (NPV). A further objective is to analyze the sensitivity of investment triggers with respect to assumed stochastic processes. To do so, an option-pricing model, which combines the stochastic simulation and the parameterization of investment triggers, is suggested. The results reveal that the investment trigger given by the ROA is considerably higher than the one given by the NPV criterion. This verifies that the ROA has an explanatory potential for the reluctance of farmers to invest in modern dairy farming. In addition, it was found that the option-pricing results indicate a high sensitivity regarding different stochastic processes as well as risk attitudes.

Farm digital tools: A systematic review of investments and environmental implications

“…Approximately 50% of the 131 articles focused on investments in specific factors of production. For example, farmer investment in land has been a focal study subject [95,96] because agricultural land is a long-term asset that can generate a steady level of income, which distinguishes it from shorter-term assets.…”

“…The second category comprises investments in set combinations of equipment, including for example irrigation systems (e.g., pumps, wells, pipes, sensors) [97,106,112]; dairy milking and management systems [109,113,114], and piglet production technology [75]. These combinations may also be a mixture of mechanical and digital equipment (e.g., software and/or accessories).…”