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

Authors: Greg Hertzler, Todd Sanderson, Tim Capon, Peter Hayman, Ross Kingwell, Anthea McClintock, Jason Crean and Alan Randall
Year: 2013

This project assessed whether farmers in wheat dominant agriculture in SA, WA and NSW will continue to adjust practices and technologies, change production systems or transform their industry under predicted climate change scenarios. A ‘Real Options for Adaptive Decisions’ (ROADs) model was developed through simulating yields from climate and actual farm data. Unlike simulation or scenario testing however, this approach specifically seeks to show how decision-makers can manage risk. The stochastic dynamics of climate change was estimated for the study areas and used to calculate option values (the amount famers are willing to pay to keep their options open before committing to an inflexible, and possibly costly option), thresholds (points at which farmers choose to switch or transform their production systems), expected times of switching (how long farmers may wait to resolve climate change uncertainties) and the probabilities of crossing the thresholds in the near or distant future. Transects were used across space as analogues for future climate scenarios (producers in one region may look to a drier and hotter region to see what their climate and production systems may look like in the future). While the results are predicated on the assumption that space is a good analogue for climate change, they are not forecasts, and they showed that climate change does not translate directly into transformations of agriculture. Rather, farmers decisions, as much as a changing climate, determine how agriculture will be transformed. For example, WA will become hotter and drier, but is very unlikely to adapt its agriculture away from wheat, let alone transform into other production systems. The Mediterranean climate and limited options for growing crops and livestock will ensure that farmers choose wheat. As a counter example, NSW may be less subject to climate change, but farmers are more likely to transform their production systems into mixed farming. The favourable climate and good soils give farmers many options to choose among.

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