Valuing the Option to Convert from Conventional to Organic Farming

Nicolai Kuminoff and Ada Wossink

No 19531, 2005 Annual meeting, July 24-27, Providence, RI from American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association)

Abstract: Based on option value theory, we develop a theoretical model to assess the dollar compensation required for the conversion to organic farming. Our empirical model is a switching regression model with two regimes and we use county level data on organic and conventional corn and soybean production in the U.S. for the application. Assuming an interest rate of 10 percent, a conventional corn-soybean grower would need to receive a one-time payment of $315 per acre to compensate for the conversion cost and an additional $1,088 per acre to conver the long run higher production and market risks. The sum of these two values equals an annual payment of $228 per acre for a 10 year contract. The results are discussed in the context of the recently introduced Conservation Security Program, which wil make direct payments to US farmers for organic practices.

Keywords: Farm; Management (search for similar items in EconPapers)
Pages: 21
Date: 2005
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:ags:aaea05:19531

DOI: 10.22004/ag.econ.19531

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