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What Is Making Vineyard Investment in Northwest Victoria, Australia, Slow to Adjust?*

Published online by Cambridge University Press:  28 June 2013

Emayenesh Seyoum-Tegegn  and
Chris Chan
Emayenesh Seyoum-Tegegn
Affiliation:
Senior Quantitative Economist, Economics and Social Research Branch, Victorian Department of Primary Industries, Australia. Email: emma.seyoum@dpi.vic.gov.au
Chris Chan
Affiliation:
Principal Scientist, Economic and Policy Modelling, Economics and Social Research Branch, Victorian Department of Primary Industries, Australia. Email: chris.chan@dpi.vic.gov.au
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Abstract

This paper reports a use of the real-options valuation methodology to analyze wine grape vineyard investment under price and yield uncertainty. Threshold annual rates of revenue per hectare to trigger entry and exit, respectively, were calculated for three different sizes of wine grape vineyards in northwest Victoria, Australia. The modeling identified lower exit and higher entry triggers than would be indicated by a conventional approach that ignores the uncertainty underpinning adaptive investment decisions. Between these triggers is a relatively wide gap of estimated indeterminacy in vineyard investment that 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 vineyard 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. (JEL Classification: C61, G11, I25, Q12)

Keywords

Australiaentry and exitnorthwest Victoriareal optionswine grape
Type
Research Article
Information
Journal of Wine Economics , Volume 8 , Issue 1 , May 2013 , pp. 83 - 102
Copyright
Copyright © American Association of Wine Economists 2013 

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Footnotes

*

We would like to thank Dr Anke Leroux of the Department of Economics, Monash University, and Ms Anthea McClintock of NSW Trade and Investment for providing valuable comments on a draft of the paper. Any errors remaining are the authors’ responsibility. Moreover, the views expressed in this paper are those of the authors and do not necessarily reflect the views of the authors’ employer, namely the Victorian Department of Primary Industries.

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