Transforming agriculture with real options

12 July 2011

Agriculture and climate change specialist, Associate Professor Greg Hertzler, from Agricultural and Resource Economics within the Faculty of Agriculture, Food and Natural Resources said the highly competitive grant will allow his team to determine the thresholds farmers may cross in dealing with climate change.

Hertzler says the project is about keeping the farming industry's options open.

"Formal methods for quantifying and making decisions under risk have not done as well as good old common sense, until recently," says Hertzler.

"In the 1990s a new method was developed which allows us to think rigorously about our options. It evolved as economists began adapting the methods of financial options to the real world.

"Our new method allows us to think objectively about decisions in our complex, dynamic and nonlinear world, subject to thresholds and risks of irreversible damage.

"Real options can be applied to agriculture undergoing climate change in two ways. The first way is a framework for communication among producers and researchers. The second way translates the adaptive decisions of producers into mathematical models and solves for the expected transformation of complex systems.

"In this project, we use real options to communicate with producers who are managing wheat dominated agricultural systems. From this knowledge, we model how they may choose to transform the industry as the climate changes."

Hertzler says once the decisions of growers are understood, the project will assess the implications for stranded assets, new technologies and the resilience of agriculture undergoing climate change.

The grants are administered by the National Climate Change Adaptation Research Facility, a federal government supported agency focused on generating the information needed by decision-makers in government and in vulnerable sectors and communities to manage the risks of climate change.

Contact: Associate Professor Greg Hertzler

Phone: 02 9351 5459

Email: 2b152f32182b3710054b181127061d38270504126a37271f4c2217