A Real Options Analysis of Automatic Milking Systems

Phoebe D. Engel and Jeffrey Hyde

Agricultural and Resource Economics Review, 2003, vol. 32, issue 2, 282-294

Abstract: Automatic, or robotic, milking systems have the potential to significantly change the way milk is produced on U.S. dairy farms. However, there is a high degree of uncertainty associated with adoption of this new technology. A real options approach is used to analyze the decision to replace an operational milking system with an automatic milking system. The most important source of uncertainty is shown to be the length of the technology's useful life. Under our assumptions, the automatic system is always an optimal investment if it is certain that it will last longer than the operational system being replaced.

Date: 2003
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