Keywords:real options, investment valuation, commercialisation, wheat, drought tolerance
Uncertainty, sunk investment costs and managerial flexibility means standard investment budgeting methods such as net present value are ineffective and undervalue risky investments. Real options attains a more accurate and comprehensive assessment of investments. In this study, we apply a real options analytical framework to investment decisions during the research and development (R&D) process of a drought tolerant wheat trait. The results suggest the option value for investment is positive at each R&D stage and that investors should continue to invest. Biotechnology firms should use a real options analytical framework like the one applied in this paper for investment strategy development and for investment decisions involving uncertainty, sunk costs and decision flexibility.
ABARES. (2013). AGSURF Data Retrieved 13 August 2013, from http://apps.daff.gov.au/AGSURF/
Agrimoney. (2014, May 23). Drought-hit Turkey forceasts wheat output drop, from http://www.agrimoney.com/news/drought-hit-turkey-forecasts-wheat-output-drop--7093.html
Alpuerto, V.E.B., Norton, G.W., Alwang, J. & Ismail, A.M. (2009). Economic Impact Analysis of Marker-Assisted Breeding for Tolerance to Salinity and Phosphorous Deficiency in Rice. Applied Economic Perspectives and Policy, 31(4), 779-792.
Amram, M., et al. (1999). Real Options: Managing Strategic Investment in an Uncertain World. Boston, Massachusetts: Harvard Business School Press.
Antoncheva, S. (2012, October 9). Kazakh grain crop plunges 47% as drought affects growing areas, Bloomberg. Retrieved from http://www.bloomberg.com/news/2012-10-09/kazakh-grain-crop-plunges-47-as-drought-affects-growing-areas.html
Arora, A. & Bansal., S. (2011). Diffusion of Bt Cotton in India: Impact of Seed Prices and Varietal Approval. Applied Economic Perspectives and Policy, 34(1), 102-118.
Australian Wheat Board. (2014). Daily Contract Prices Bid Sheets.
Barry, C. (2008, 29 May). Australia's long drought withering wheat, rice supplies, National Geographic News. Retrieved from http://news.nationalgeographic.com.au/news/2008/05/080529-food-australia.html
Bell, D. E., et al. (2006). Monsanto: Realizing Biotech Value in Brazil Harvard Business School Case 507-018. Cambridge, M.A.: Harvard University.
Bloomberg. (2013). Australian Government Bonds Retrieved 10 October, 2013, from http://www.bloomberg.com/markets/rates-bonds/government-bonds/australia/
Bradsher, K. (2011). Crops wither and prices rise in Chinese drought, New York Times. Retrieved from http://www.nytimes.com/2011/02/04/world/asia/04china.html
Bureau of Meteorology. (2013). Climate Data Online Retrieved 10 October 2013, from http://www.bom.gov.au/climate/data/
Carew, R. (2005). Science Policy and Agricultural Biotechnology in Canada. Applied Economic Perspectives and Policy, 27(3), 300-316.
Chillymanjaro. (2012). Drought hits Spain's wheat crop. The Watchers Retrieved 23 January 2015, from http://thewatchers.adorraeli.com/2012/05/12/drought-hits-spains-wheat-crop/
Craze, M. (2009). Argentina drought may halt wheat exports for 1st Time, Bloomberg. Retrieved from http://www.bloomberg.com/apps/news?pid=newsarchive&sid=acXLbbY1XcxE
Demont, M., et al. (2007). GM Crops in Europe: How Much Value and For Whom? Eurochoices, 6(3), 46-53.
Diggs, D. (1991). Drought Experience and Perception of Climatic Change among Great Plains Farmers. Great Plains Research: A Journal of Natural and Social Sciences (Paper 1).
Dixit, A. K., et al. (1994). Investment under uncertainty. Princeton University Press, United States.
European Commission. (2008). Agricultural insurance schemes, Chapter 6: Existing agricultural insurance systems.
FAO. (2011). Agricultural insurance in Asia and the Pacific region.
FAOSTAT. (2013a). Wheat production Retrieved 17 December2014, from http://faostat3.fao.org/faostat-gateway/go/to/download/Q/QC/E
FAOSTAT. (2013b). Wheat trade Retrieved 23 October 2014, from http://faostat3.fao.org/faostat-gateway/go/to/download/Q/QC/E
FAOSTAT. (2013c). Wheat yield Retrieved 17 January 2015, from http://faostat3.fao.org/faostat-gateway/go/to/download/Q/QC/E
Furtan, W. H., et al. (2003). The optimal time to license a biotech "lemon". Contemporary Economic Policy, 21(4), 433-444.
Guthrie, G. (2009). Real Options in theory and practice. New York, U.S.A: Oxford University Press.
Hardaker, J. B., et al. (2004). Coping with Risk in Agriculture. Oxfordshire: CABI Publishing.
IFC Agri-Insurance Development Project. (2011). Ukraine - Information on Insurance of Winter Crops in 2011 Underwriting Year Retrieved 28 March 2014, from http://www.agroinsurance.com/en/analytics?pid=17982
Irin Asia. (2010, 28 January). Pakistan: Drought fears for wheat farmers Retrieved 7 November 2014, from http://www.irinnews.org/report/87907/pakistan-drought-fears-for-wheat-farmers
James, C. (2008). Global Status of Commercialized Biotech/GM Crops ISAAA Briefs (Vol. Brief 39).
Johnson, D. D., et al. (2005). Economic and welfare impacts of commercializing a herbicide-tolerant, biotech wheat. Food Policy, 30, 162-184.
Kaczala, M., et al. (2013). Factors affecting the demand for index-based agriculture insurance in Poland Insurance Review (4/2013 ed.): Polish Insurance Association.
Kant, S., et al. (2015). Regulated Expression of a Cytokinin Biosynthesis Gene IPT Delays Leaf Senescence and Improves Yield under Rainfed and Irrigated Conditions in Canola (Brassica napus L.). PLoS ONE, 10(1).
Khakbazan, M., et al. (2010). Impacts of extreme weather events, climate change, and crop water relationship for crops grown in Western Canada. In A. López-Francos (Ed.), Economics of drought and drought preparedness in a climate change context (pp. 63-70). Retrieved from http://om.ciheam.org/om/pdf/a95/00801326.pdf.
Klak, B., et al. (2013). AgriInsurance in Canada, Presentation to Agriculture Financial Services Corporation, Alberta, Canada.
Kramer, A. (2010). Russia, crippled by drought, bans grain exports, The New York Times. Retrieved from http://www.nytimes.com/2010/08/06/world/europe/06russia.html?_r=0
Mahul, O., et al. (2010). Government Support to Agricultural Insurance.
Mahul, O., et al. (2011). Enhancing Crop Insurance in India: The World Bank and Global Facility for Disaster Reduction and Recovery.
Mason, R. (2011, June 4). Drought may cost UK farmers £400m,
The Telegraph. Retrieved from http://www.telegraph.co.uk/finance/economics/8557156/Drought-may-cost-UK-farmers-400m.html
McCarl, B. A., Bessley, D.A. (1989). Estimating an upper bound on the Pratt risk aversion coefficient when the utility function is unknown. Australian Journal of Agricultural Economics, 33(1), 56-63.
McDougall, P. (2011). The cost and time involved in the discovery, development and authorisation of a new plant biotechnology derived trait A Consultancy Study for Crop Life International.
Mukherji, B. (2014). India girds for a drought, The Wall Street Journal. Retrieved from http://blogs.wsj.com/indiarealtime/2014/06/13/india-girds-for-a-drought/
Palisade Corporation. (2013). @Risk: Risk Analysis and Simulation Add-In for Microsoft Excell.
Pardey, P. G., et al. (2006). Agricultural Research: A Growing Global Divide? Agricultural Science and Technology Indicators Initiative. Washington, D.C.: International Food Policy Research Institute.
Price, G. K., et al. (2003). Size and Distribution of Market Benefits from Adopting Biotech Crops Technical Bulletin Number 1906.
Rain and Hail Insurance Society. (2013). 2013 Crop Insurance Update.
Reuters. (2011). Drought in Europe hits wheat crop, The New York Times. Retrieved from http://www.nytimes.com/2011/05/20/business/global/20iht-wheat20.html
Richardson, J. W., et al. (2005). Simetar: Simulation for Excel© to Analyze Risk: Texas A&M University.
Savu, I. (2012, July 28). Romanian wheat crop falls on drought as harvest nears completion, Bloomberg. Retrieved from http://www.bloomberg.com/news/2012-07-27/romanian-wheat-crop-falls-on-drought-as-harvest-nears-completion.html
Schwab, K. (2013). The Global Competitiveness Report 2013-14. Geneva: World Economic Forum.
Schwab, K., et al. (2014). The Global Competitiveness Report. In W. E. Forum (Ed.).
Shakya, S., et al. (2013). Valuing New Random Genetically Modified
(GM) Traits in Corn. Journal of Agricultural and Resource Economics, 38(1), 107-123.
Shakya, S., et al. (2013). Valuing New Random Genetically Modified (GM) Traits in Corn. Journal of Agricultural and Resource Economics, 38(1), 107-123.
Smit, B., Blain, R., & Keddie, P. (1997). Corn hybrid selection and climatic variability: Gambling with Nature? The Canadian Geographer, 41(4), 429-438.
Thanvi, K. U. (2013, February 26). Crop Loan Insurance in Pakistan. Paper presented at the AgriFin Webinar, Pakistan.
The Crop Site. (2014, 26 August). Drought Affects Iran's Wheat Production Retrieved 23 January 2015, from http://www.thecropsite.com/news/16648/drought-affects-irans-wheat-production
The World Bank. (2007). China: Innovations in Agricultural Insurance.
Tucker, C., Eakin, H., & Castellanos, E. (2010). Perceptions of risk and adaptation: Coffee producers, market shocks, and extreme weather in Central America and Mexico. Global Environmental Change, 20(1), 23-32.
USDA. (2006, May 15). Ukraine wheat yield forecast to drop due to severe fall drought. Commodity Intelligence Report Retrieved 10 November 2014, from http://www.pecad.fas.usda.gov/highlights/2006/05/ukr_wheat_16may2006/
USDA. (2015). Wheat Baseline, 2015-24 Retrieved 5 April, 2016, from http://www.ers.usda.gov/topics/crops/wheat/usda-wheat-baseline,-2015-24.aspx#World
USDA Joint Agricultural Weather Facility. (2006). Global crop production review: World Meterological Organization.
Wilson, W., et al. (2015). Valuing new random genetically modified (GM) traits with real options. Agricultural Finance Review, 75(2), 213-229.
Worthington, B. (2014). US farmers abandoning wheat crops, ABC Rural. Retrieved from http://www.abc.net.au/news/2014-06-19/us-wheat-crops/5535024