Greg Hertzler

Adapting to climate change and managing climate risks by using real options

Adapting to climate change and managing climate risks are new challenges for farmers, community leaders, and catchment management authorities. To meet this challenge, a new method of making decisions under risk may help. This method is called real options. It begins with common sense and adds rigour. It helps us decide when to keep our options open and when to foreclose options and create new ones. In this paper, real options are explained and applied to several examples by developing a new type of decision diagram. The diagrams are a language for thinking about complex decisions under risk. Farmers, community leaders, and catchment management authorities can develop similar diagrams and use them to communicate with other decision makers and with researchers. Finally, the decision diagrams are related to new mathematical tools to help find optimal decisions for managing climate risks.

Economic evaluation of strategies for management of herbicide resistance

Abstract Resistance of weeds to chemical herbicides is a problem of rapidly growing importance in agriculture. In Australia there has been a very rapid growth in the occurrence of resistance in populations of annual ryegrass ( Lolium rigidum ) growing as a weed in continuous cropping rotations. in this paper a dynamic model of herbicide resistance development in ryegrass is used to examine various aspects of weed management. The model is used to identify optimal combinations of chemical and non-chemical weed control for a range of scenarios. It is found that the period for which herbicide use can profitably be continued prior to onset of resistance is highly sensitive to the effectiveness of the non-chemical control. It is shown that under plausible conditions, the inclusion of pasture in the rotation to delay the onset of herbicide resistance (with weed seed reductions through grazing) can be a profitable strategy.

Dynamic Decisions under Risk: Application of Ito Stochastic Control in Agriculture

In agricultural economics, most studies of dynamic decisions under risk have been empirical with less emphasis on theory. In finance, resource economics, and general economics, however, Ito stochastic control is popular for theoretical work. Optimal decisions can be characterized using the powerful Ito stochastic calculus. This paper describes the assumptions and methods of Ito control, constructs a dynamic model of agricultural decisions under risk, and illustrates with four examples.

How real options and ecological resilience thinking can assist in environmental risk management

In this paper, we describe how real option techniques and resilience thinking can be integrated to better understand and inform decision-making around environmental risks within complex systems. Resilience thinking offers a promising framework for framing environmental risks posed through the non-linear responses of complex systems to natural and human-induced disturbance pressures. Real options techniques offer the potential to directly model such systems including consideration of the prospect that the passage of time opens new options while closing others. The implications (cost) of risk can be described by option prices that describe the net present values generated by alternative regimes in the resilience construct, and the shadow prices of particular attributes of resilience such as the speed of return from a shock and the distance or time to transition. Examples are provided which illustrate the potential for integrated resilience and real options approaches to contribute to understanding and managing environmental risk.

Bioeconomics of reservoir aquaculture in Vietnam

Reservoir aquaculture has developed in an ad hoc manner in Vietnam to date. A bioeconomic model of reservoir aquaculture in northern Vietnam is presented in this paper to highlight issues of developmental importance of reservoir aquaculture in Vietnam. The biological model is based on a conventional von Bertalanffy growth function and the economic model is a net revenue function. The greatest source of costs for the operation are restocking costs (75%) and contract labor costs (18 percent). Benchmark net revenue is approximately 8.7 million VND (approximately US

Optimal Dynamic Management of Agricultural Land-Uses: An Application of Regime Switching

539). The stocking density, length of time between stocking and harvest and harvesting efficiency have the largest impact on net revenue. The inclusion of aquaculture into government fisheries development plans with research focused on development of fingerling production, preparation of flooded land for aquaculture production and strengthening institutional arrangements for reservoir leasing and credit arrangements, is likely to lead to increased capitalization and investment, and therefore greater revenues for local fishing populations.

Compounding and Discounting Under Risk: Net Present Values and Real Option Values

The capacity of global agricultural production to meet increased demand for food from population growth and wealth accumulation is threatened by extensive land degradation. Nonetheless, previous research has focused primarily on the dynamic implications of input management and ignored land-use choice. This paper extends this theory through an examination of the intertemporal management of agricultural land through the use of non-crop inputs, such as fertilizer, and land uses that either degrade or restore productivity. The need to consider the relative total asset value of alternative crops over time is demonstrated. Moreover, higher output prices for degrading crops are shown to increase their relative value, motivating the later adoption of substitutes. An inability of land markets to reflect differences in resource quality and low capital malleability promote greater degradation. However, substitution of complementary effects through input use may help to sustain productivity. These factors are discussed in the context of crop sequence management in Western Australian cropping systems.

AN OPTIMAL CONTROL MODEL FOR INTEGRATED WEED MANAGEMENT UNDER HERBICIDE RESISTANCE

Economics and the Future tackles the discounting issue from a number of angles, ranging from relatively short-term private financial decisions, to very long-term public issues spanning generations. The authors present differing perspectives and original ideas in a style that remains accessible while addressing some of the more difficult questions about discounting in theory and practice. It reveals that the economic issues regarding time are embedded in a broader social, ethical and philosophical context.