Transitioning to Organic Crop Production: A Dynamic Programming Approach
By: Delbridge, Timothy A.; King, Robert P.
Delbridge, Timothy A.; King, Robert P., Transitioning to Organic Crop Production: A Dynamic Programming Approach, Journal of Agricultural and Resource Economics, Volume 41, Issue 3, September 2016, Pages 481-498
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.