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Valuing switching options in international grain marketing

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  • Stephan Johansen
  • William Wilson

Abstract

An important strategy for commodity trading firms is geographical diversification through acquisitions and greenfield development, often justified with the quest for multiple origins. This strategy can be interpreted as a “switching option” which tend to be undervalued using traditional valuation techniques. This paper develops a stochastic binomial real options model to value networks of export elevators. It is applied to soybean trading for shipments from ports in the United States, Brazil, and Ukraine. The paper estimates the value of the option of being able to switch origins in export trade. This option value is substantial and is determined partly by margin distributions and correlations among these.

Suggested Citation

  • Stephan Johansen & William Wilson, 2019. "Valuing switching options in international grain marketing," Agribusiness, John Wiley & Sons, Ltd., vol. 35(3), pages 423-438, July.
    • Handle: RePEc:wly:agribz:v:35:y:2019:i:3:p:423-438
    DOI: 10.1002/agr.21593
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    References listed on IDEAS

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    1. Caves, Richard, 1977. "Organization, Scale, And Performance In The Grain Trading Industry," Harvard Institute of Economic Research (HIER) Archive 294561, Harvard University, Department of Economics.
    2. Wilson, William W. & Dahl, Bruce L., 1999. "Transnational Grain Firms: Evolution And Strategies In North America," Agricultural Economics Reports 23278, North Dakota State University, Department of Agribusiness and Applied Economics.
    3. Wilson, William W. & Dahl, Bruce L., 1999. "Transnational Grain Companies: Evolution And Strategies In North America; Summary," Agricultural Economics Reports 23254, North Dakota State University, Department of Agribusiness and Applied Economics.
    4. Caves, Richard E., 1977. "Organization, Scale, and Performance of the Grain Trade," Food Research Institute Studies, Stanford University, Food Research Institute, vol. 16(3), pages 1-18.
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