Hostname: page-component-76fb5796d-9pm4c Total loading time: 0 Render date: 2024-04-25T14:45:10.937Z Has data issue: false hasContentIssue false
  • English
  • Français

When to Get In and Out of Dairy Farming: A Real Option Analysis

Published online by Cambridge University Press:  15 September 2016

Loren W. Tauer
Loren W. Tauer*
Affiliation:
Department of Applied Economics and Management at Cornell University, Ithaca, New York
Get access

Abstract

The Dixit entry/exit real option model was applied to the entry/exit decisions of New York dairy farmers. For the cost structure of a 500-cow farm, the entry milk price is $17.52 per hundredweight (cwt) and the exit milk price is $10.84. For the 50-cow farm cost structure, the entry price is higher at $23.71 per cwt, and the exit price is also higher at $13.48. If infinite numbers of representative farms enter and exit at these prices, the price of milk should range between $13.48 and $17.52 per cwt.

Keywords

dairy farmingentry-exitinvestmentreal options
Type
Contributed Papers
Information
Agricultural and Resource Economics Review , Volume 35 , Issue 2 , October 2006 , pp. 339 - 347
Copyright
Copyright © 2006 Northeastern Agricultural and Resource Economics Association 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Bragg, L. A., and Dalton, T.J. 2004. “Factors Affecting the Decision to Exit Dairy Farming: A Two Stage Regression Analysis.” Journal of Dairy Science 87(9): 3092–3098.Google Scholar
Caballero, R. J., and Pindyck, R. S. 1996. “Uncertainty, Investment, and Industry Evolution.” International Economic Review 37(3): 641–662.Google Scholar
Carey, J. M., and Zilberman, D. 2002. “A Model of Investment under Uncertainty: Modern Irrigation Technology and Emerging Markets in Water.” American Journal of Agricultural Economics 84(1): 171–183.CrossRefGoogle Scholar
Dixit, A. 1989. “Entry and Exit Decisions under Uncertainty.” Journal of Political Economy 97(3): 620–638.CrossRefGoogle Scholar
Dixit, A. K., and Pindyck, R. S. 1994. Investment Under Uncertainty. Princeton, NJ: Princeton University Press.Google Scholar
Engel, P. D., and Hyde, J. 2003. “A Real Options Analysis of Automatic Milking Systems.” Agricultural and Resource Economics Review 32(2): 282–294.Google Scholar
Hull, J. C. 2002. Options, Futures, and Other Derivatives (5th edition). Upper Saddle River, NJ: Prentice Hall. Google Scholar
Johnson, G. L. 1960. “The State of Agricultural Supply Analysis.” Journal of Farm Economics 42(2): 435–452.Google Scholar
Knoblauch, W.A., Putnam, L. D., and Karszes, J. 2003. “Dairy Farm Management Business Summary, New York State, 2002.” Research Bulletin No. 2003-03, Department of Applied Economics and Management, Cornell University, Ithaca, NY.Google Scholar
Leahy, J.V. 1993. “Investment in Competitive Equilibrium: The Optimality of Myopic Behavior.” Quarterly Journal of Economics 108(4): 1105–1133.Google Scholar
Luenberger, D. G. 1998. Investment Science. Oxford: Oxford University Press.Google Scholar
McDonald, R., and Siegel, D. 1985. “Investment and the Valuation of Firms When There Is an Option to Shut Down.” International Economic Review 26(2): 331–349.Google Scholar
McDonald, R., and Siegel, D. 1986. “The Value of Waiting to Invest.” Quarterly Journal of Economics 101(4): 707–728.Google Scholar
New York Agricultural Statistics Service. 2005. “2005 Annual Bulletin.” New York Agricultural Statistics Service, Albany, NY.Google Scholar
Purvis, A., Boggess, W. G., Moss, C. B., and Holt, J. 1995. “Technology Adoption under Irreversibility and Uncertainty.” American Journal of Agricultural Economics 77(3): 541–551.Google Scholar
Richards, T. J., and Patterson, P. M. 1998. “Hysteresis and the Shortage of Agricultural Labor.” American Journal of Agricultural Economics 80(4): 683–695.Google Scholar
Short, S. D. 2004. “Characteristics and Production Costs of U. S. Dairy Operations.” Statistical Bulletin No. 974-6, Economic Research Service, U. S. Department of Agriculture, Washington, D. C. Google Scholar
Tomek, W. G. 2000. “Commodity Prices Revisited.” Agricultural and Resource Economics Review 29(2): 125–137.Google Scholar
Tweeten, L. G., and Quance, C. L. 1969. “Positivistic Measures of Aggregate Supply Elasticities: Some New Approaches.” American Journal of Agricultural Economics 51(2): 342–352.CrossRefGoogle Scholar