Humboldt-Universität zu Berlin - Quarterly Journal of International Agriculture

Quarterly Journal of International Agriculture No. 3/12

Investments in Kazakhstani Dairy Farming:
A Comparison of Classical Investment Theory and the Real Options Approach

Dulat Tubetov, Oliver Musshoff and Ulla Kellner
Georg-August-Universität Göttingen, Germany


This study analyzes the explanatory potential of the real options approach (ROA) regarding the reluctance of Kazakhstani farmers to invest in modern dairy farming. More precisely, it compares the valuation of the ROA with those of the classical investment criterion such as the net present value (NPV). A further objective is to analyze the sensitivity of investment triggers with respect to assumed stochastic processes. To do so, an option-pricing model, which combines the stochastic simulation and the parameterization of investment triggers, is suggested. The results reveal that the investment trigger given by the ROA is considerably higher than the one given by the NPV criterion. This verifies that the ROA has an explanatory potential for the reluctance of farmers to invest in modern dairy farming. In addition, it was found that the option-pricing results indicate a high sensitivity regarding different stochastic processes as well as risk attitudes.

Keywords: real options approach, stochastic simulation, stochastic process, dairy farm investment, Kazakhstan

JEL: D92, Q12, C15

Vol. 51 (2012), No. 3: 257-284