Optimising adaptation decisions in macadamia production using contingent claim valuation

Jason West

Australian Journal of Agricultural and Resource Economics, 2018, vol. 62, issue 4

Abstract: Altering production systems and land management of tree crops is a costly, disruptive and ultimately irreversible decision. Using traditional valuation methods to appraise long-term land management outcomes ignores the full impact of irreversible or delayed decisions. We employ a variant of the real options decision process to examine uncertainties around climatic effects on macadamia growers and the explicit decision to adapt via cultivar replacement. We examine the trade-offs between the timing of the decision to replace macadamia cultivars by considering both the value of flexibility as well as the value of new information that can be used to resolve uncertainty. We compare the relative responses that generate the most value for growers across four geographical locations. We show that simple switching decisions using traditional valuation methods are found to be suboptimal and initiate poor decisions, potentially undermining adaptation efforts. As the rate of orchard degradation increases, the need to transition to higher-yielding cultivars becomes greater, especially for Hawaii, California and Australia where gross margins are leaner. Investment decisions are thus highly dependent on both local conditions and the economic structure of existing production systems.

Keywords: Crop; Production/Industries (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:ags:aareaj:333743

DOI: 10.22004/ag.econ.333743

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