IDEAS home Printed from https://ideas.repec.org/p/ags/aare12/124446.html
   My bibliography  Save this paper

A real-options analysis of wine grape farming in north west Victoria

Author

Listed:
  • Seyoum, Emayenesh
  • Chan, Chris

Abstract

This paper reports a use of a real-options valuation methodology to analyse wine grape farm investment under price and yield uncertainty. Revenue levels to incentivise entry and exit were calculated for three different sizes of wine grape farms in North West Victoria. The modelling identified lower exit and higher entry triggers than indicated by conventional net present value calculation. The wide gap of estimated indeterminacy in farm investment highlights the intertwined influence of numerous economic factors — cost structure, economies of scale, market volatility, transaction costs, and sunk and salvaged asset valuation. Drawing on these determinants of farm investment and disinvestment, the paper discusses the role of investment incentives in affecting industry transformation and the scope for policy intervention to assist structural adjustment of the wine grape sector.

Suggested Citation

  • Seyoum, Emayenesh & Chan, Chris, 2012. "A real-options analysis of wine grape farming in north west Victoria," 2012 Conference (56th), February 7-10, 2012, Fremantle, Australia 124446, Australian Agricultural and Resource Economics Society.
    • Handle: RePEc:ags:aare12:124446
    DOI: 10.22004/ag.econ.124446
    as

    Download full text from publisher

    File URL: https://ageconsearch.umn.edu/record/124446/files/2012AC%20Seyoum%20CP.pdf
    Download Restriction: no
    File URL: https://libkey.io/10.22004/ag.econ.124446?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Tauer, Loren W., 2006. "When to Get In and Out of Dairy Farming: A Real Option Analysis," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 35(2), pages 1-9, October.
    2. Quoc V. Luong & Loren W. Tauer, 2006. "A real options analysis of coffee planting in Vietnam," Agricultural Economics, International Association of Agricultural Economists, vol. 35(1), pages 49-57, July.
    3. Dixit, Avinash K, 1989. "Entry and Exit Decisions under Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 620-638, June.
    4. Price, T. Jeffrey & Wetzstein, Michael E., 1999. "Irreversible Investment Decisions In Perennial Crops With Yield And Price Uncertainty," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 24(01), pages 1-13, July.
    5. Glenn L. Johnson, 1960. "The State of Agricultural Supply Analysis," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 42(2), pages 435-452.
    6. Seo, Sangtaek & Salin, Victoria & Mitchell, Paul D. & Leatham, David J., 2004. "Effect Of Revenue Insurance On Entry And Exit Decisions In Table Grape Production: A Real Option Approach," 2004 Annual meeting, August 1-4, Denver, CO 20229, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    7. Graham, John R. & Harvey, Campbell R., 2001. "The theory and practice of corporate finance: evidence from the field," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 187-243, May.
    8. Schmit, Todd M. & Luo, Jianchuan & Tauer, Loren W., 2008. "Ethanol Plant Investment using Net Present Value and Real Options Analyses," Working Papers 51145, Cornell University, Department of Applied Economics and Management.
    9. McDonald, Robert L & Siegel, Daniel R, 1985. "Investment and the Valuation of Firms When There Is an Option to Shut Down," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(2), pages 331-349, June.
    10. Tauer, Loren W. & Dressler, Jonathan B., 2010. "When to Exit Dairy Farming: The Value of Waiting," EB Series 121632, Cornell University, Department of Applied Economics and Management.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Seyoum, Emayenesh & Karanja, Francis, 2014. "Investment decisions of dairy farmers in south-west Victoria under price and yield uncertainty," 2014 Conference (58th), February 4-7, 2014, Port Macquarie, Australia 183419, Australian Agricultural and Resource Economics Society.
    2. Calum G. Turvey, 2010. "Biography," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 70(1), pages 5-20, May.
    3. Tauer, Loren W., 2006. "When to Get In and Out of Dairy Farming: A Real Option Analysis," Agricultural and Resource Economics Review, Cambridge University Press, vol. 35(2), pages 339-347, October.
    4. Bolton, Patrick & Wang, Neng & Yang, Jinqiang, 2019. "Investment under uncertainty with financial constraints," Journal of Economic Theory, Elsevier, vol. 184(C).
    5. Strebulaev, Ilya A. & Whited, Toni M., 2012. "Dynamic Models and Structural Estimation in Corporate Finance," Foundations and Trends(R) in Finance, now publishers, vol. 6(1–2), pages 1-163, November.
    6. Pieralli, Simone & Hüttel, Silke & Odening, Martin, 2014. "Abandonment of milk production under uncertainty and inefficiency: The case of West German farms," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 170236, Agricultural and Applied Economics Association.
    7. Alvarez, Luis H. R., 1998. "Exit strategies and price uncertainty: a Greenian approach," Journal of Mathematical Economics, Elsevier, vol. 29(1), pages 43-56, January.
    8. Manuel Guerra & Cláudia Nunes & Carlos Oliveira, 2021. "The optimal stopping problem revisited," Statistical Papers, Springer, vol. 62(1), pages 137-169, February.
    9. Feil, Jan-Henning & Musshoff, Oliver, 2013. "Investment, disinvestment and policy impact analysis in the dairy sector: a real options approach," Structural Change in Agriculture/Strukturwandel im Agrarsektor (SiAg) Working Papers 159229, Humboldt University Berlin, Department of Agricultural Economics.
    10. Pindyck, Robert S, 1991. "Irreversibility, Uncertainty, and Investment," Journal of Economic Literature, American Economic Association, vol. 29(3), pages 1110-1148, September.
    11. Tsekrekos, Andrianos E., 2010. "The effect of mean reversion on entry and exit decisions under uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 34(4), pages 725-742, April.
    12. Avinash K. Dixit & Robert S. Pindyck, 1998. "Expandability, Reversibility, and Optimal Capacity Choice," NBER Working Papers 6373, National Bureau of Economic Research, Inc.
    13. Paolo M. Panteghini, 2012. "Corporate Debt, Hybrid Securities, and the Effective Tax Rate," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 14(1), pages 161-186, February.
    14. Dixit, Avinash, 1995. "Irreversible investment with uncertainty and scale economies," Journal of Economic Dynamics and Control, Elsevier, vol. 19(1-2), pages 327-350.
    15. de Angelis, Tiziano & Ferrari, Giorgio & Martyr, Randall & Moriarty, John, 2016. "Optimal entry to an irreversible investment plan with non convex costs," Center for Mathematical Economics Working Papers 566, Center for Mathematical Economics, Bielefeld University.
    16. Tsekrekos, Andrianos E. & Yannacopoulos, Athanasios N., 2016. "Optimal switching decisions under stochastic volatility with fast mean reversion," European Journal of Operational Research, Elsevier, vol. 251(1), pages 148-157.
    17. Murat Isik, 2005. "Incorporating decision makers' risk preferences into real options models," Applied Economics Letters, Taylor & Francis Journals, vol. 12(12), pages 729-734.
    18. Paolo M. Panteghini & Michele Moretto, 2007. "Preemption, Start-Up Decisions and the Firms' Capital Structure," Economics Bulletin, AccessEcon, vol. 4(39), pages 1-14.
    19. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    20. Lambrecht, Bart M., 2017. "Real options in finance," Journal of Banking & Finance, Elsevier, vol. 81(C), pages 166-171.

    More about this item

    Keywords

    Crop Production/Industries;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ags:aare12:124446. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: AgEcon Search (email available below). General contact details of provider: https://edirc.repec.org/data/aaresea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.