Will primary producers continue to adjust practices and technologies, change production systems or transform their industry – An application of real options

Media type: 
Reports
Author/s: 
Greg Hertzler
Todd Sanderson
Tim Capon
Peter Hayman
Ross Kingwell
Anthea McClintock
Jason Crean
Alan Randall
Institution/s: 
The University of Sydney
CSIRO
South Australian Research and Development Institute
Department of Agriculture and Food WA
New South Wales Trade and Investment
State: 
New South Wales
Year: 
2013

This research estimates the transformation of wheat dominant cropping systems in SA, NSW and WA in response to climate change, where farmers’ decisions determine how agriculture will be transformed.

Abstract

The long term sustainability of Australian crop and livestock farms is threatened with climate change and climate variability. In response, farmers may decide to (1) adjust practices and technologies, (2) change production systems, or (3) transform their industries, for example, by relocating to new geographical areas. Adjustments to existing practices are easy to make relative to changes to production systems or transformations of an industry. Switching between production regimes requires new investments and infrastructure and can leave assets stranded. These changes can be partially or wholly irreversible but hysteresis effects can make switching difficult and mistakes costly to reverse.

‘Real options’ is a framework to structure thinking and analysis of these difficult choices. Previous work has demonstrated how real options can be applied to adaptation, and extends traditional economic analyses of agricultural investment decisions based on net present values to better represent the uncertainty and risks of climate change.

This project uses transects across space as analogues for future climate scenarios. We simulate yields from climate data and draw on data from actual farms to estimate a real options model referred to as ‘Real Options for Adaptive Decisions’ (ROADs). We present results for the transformation of wheat dominant cropping systems in South Australia, New South Wales, and Western Australia. We find that farmers’ decisions, as much as a changing climate, determine how agriculture will be transformed.

Please cite this report as:
Hertzler, G, Sanderson, T, Capon, T, Hayman, P, Kingwell, R, McClintock, A, Crean, J & Randall, A 2013, Will primary producers continue to adjust practices and technologies, change production systems or transform their industry? An application of real options, National Climate Change Adaptation Research Facility, Gold Coast, 93 pp.
 
 
This photo is copyright © Dean Browne, Flickr Creative Commons
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