Transitioning to Organic Crop Production: A Dynamic Programming Approach

• Main Authors: Timothy A. Delbridge, Robert P. King
• Format: Article
• Language: English
• Published: Western Agricultural Economics Association 2016-09-01
• Series: Journal of Agricultural and Resource Economics
• Subjects: dynamic programming; organic farming; organic transition; real options
• Online Access: https://ageconsearch.umn.edu/record/246250

Despite evidence that organic cropping systems in the Midwest can be more profitable than conventional systems, only a small percentage of cropland has been certified as organic. This paper models the decision to transition to organic crop production as a dynamic programming problem in which investment is reversible but includes sunk costs. Results indicate that the risk and unrecoverable costs associated with organic transition lead to a significant option value, and this provides a partial explanation for low transition rates in the baseline scenario. Sensitivity to expected organic yield and price levels is explored, as are the costliness of reverse transition and the short-term effect of high conventional return levels.