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Business opportunity assessment in Slovene organic spelt processing: application of real options model

Published online by Cambridge University Press:  15 February 2011

Karmen Pažek  and
Črtomir Rozman
Karmen Pažek*
Affiliation:
Faculty of Agriculture and Life Sciences, University of Maribor, Pivola 10, 2311 Hoče, Slovenia.
Črtomir Rozman
Affiliation:
Faculty of Agriculture and Life Sciences, University of Maribor, Pivola 10, 2311 Hoče, Slovenia.
*
*Corresponding author: karmen.pazek@uni-mb.si
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Abstract

Decision making in organic farming is related to risk and uncertainty, and options must be evaluated in the decision-making process. This paper presents the methodology of an integrated deterministic simulation system (KARSIM 1.0) application for decision-making support on organic farms in northeastern Slovenia. An emphasis to modify the net present value (NPVt) criterion by incorporating the real options approach was made. Its application is shown in organic spelt (Triticum aestivum ssp. spelta McKey) production and processing using two real options approaches, the Black–Scholes and binomial models. The NPVt indicates that the decision to process spelt for animal fodder is financially unfeasible, while the real options approach differentiates the results by organic spelt grain and flour production for human nutrition. It may be concluded that the real options approach can be useful when assessing projects with uncertainty, sunk costs and irreversibility, and it can provide for examining agricultural investment decisions.

Keywords

farm decision makingbinomial modelBlack–Scholes modelnet present valueorganic spelt
Type
Preliminary Report
Information
Renewable Agriculture and Food Systems , Volume 26 , Issue 3 , September 2011 , pp. 179 - 184
Copyright
Copyright © Cambridge University Press 2011

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