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Switching to Perennial Energy Crops Under Uncertainty and Costly Reversibility
Author(s) -
Song Feng,
Zhao Jinhua,
Swinton Scott M.
Publication year - 2011
Publication title -
american journal of agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.949
H-Index - 111
eISSN - 1467-8276
pISSN - 0002-9092
DOI - 10.1093/ajae/aar018
Subject(s) - subsidy , economics , energy crop , sunk costs , natural resource economics , crop rotation , renewable energy , agricultural economics , econometrics , microeconomics , crop , bioenergy , agronomy , ecology , biology , market economy
We study a farmer's decision to convert traditional cropland into land for growing dedicated energy crops, taking into account sunk conversion costs and uncertainties in crop returns. The optimal decision rules differ significantly from the expected net present value rule, which ignores uncertainties, and from real options models that allow only one‐way conversion into energy crops. These models also predict drastically different patterns of land conversions into and out of energy crops over time. Using corn–soybean rotation and switchgrass as examples, we show that the model predictions are sensitive to assumptions about stochastic processes of the returns. Government policies might have unintended consequences: subsidizing conversion costs into switchgrass may not much affect proportions of land in switchgrass in the long run.