Valuing New Random Genetically Modified (GM) Traits in Corn

By Shakya, Sumadhur; Wilson, William W. et al. | Journal of Agricultural and Resource Economics, April 2013 | Go to article overview

Valuing New Random Genetically Modified (GM) Traits in Corn


Shakya, Sumadhur, Wilson, William W., Dahl, Bruce, Journal of Agricultural and Resource Economics


Numerous genetically modified (GM) traits are currently under development. Those currently being developed for corn include traits for drought tolerance, cold tolerance, and nitrogen use efficiency, among others. The value of these traits is random and sporadic, creating challenges in assessing its ex ante value. This study estimates the ex ante value of a GM trait in corn with random characteristics. A real option model is developed to capture risks and returns associated with the traits, and estimates are derived for drought tolerant corn. Base case results indicate a slight chance that the option value would be out-of-the-money during the discovery phase. In all other phases, the expected value is in-the-money. The results are highly sensitive with respect to trait efficiency and regarding assumptions of randomness in some of the other important variables, particularly trait values.

Key words: real options, risk premium, stochastic efficiency, trait valuation

(ProQuest: ... denotes formulae omitted.)

Introduction

Genetically modified (GM) crops have had a dramatic impact on agriculture worldwide. Corn has benefited immensely from the introduction of GM traits, and many new traits are under development, including drought and cold tolerance and nitrogen-use efficiency (McMahon, 2011 ; Birger, 2011 a,b). While earlier GM traits had relatively ubiquitous applications, the value of these new traits is less clear because their usefulness depends on sporadic environmental conditions. For agbiotechnology firms, determining the value of future prospective traits is an important managerial decision. There is a high degree of uncertainty regarding many of the factors that determine trait valuation, including efficacy, regulatory approval, commercial acceptance, competing traits, and prices that can be charged for a trait. The high uncertainty of trait valuation means that the ex ante values of traits are also random.

This study estimates the ex ante value of GM corn traits with random valuations, in this case drought-tolerant (DT) corn. Trait development is considered research and development (R&D) and is interpreted as a real option. While there are many types of real options, here R&D is interpreted as a compound-call option. Given the risks and returns across traits, this interpretation is appropriate for determining the ex ante value for these GM traits.

The analysis estimates distributions for farm budgets with and without the trait, the value of which depends on drought probability and trait efficiency. We then determine the grower's value by estimating risk premiums for simulated budgets using stochastic efficiency with respect to a function (SERF). This grower's value is the basis for trait prices in the option model. A real-option model is used to estimate the trait's stochastic value at each stage of development. The study builds on earlier research using real options to evaluate R&D (e.g., Kolbe, Morris, and Teisberg, 1991; Luehrman, 1997; Lee and Paxson, 2001; Jensen and Warren, 2001; Seppä and Laamanen, 2001) and applications of real options to value post-development costs and benefits for GM traits in crops (e.g., Furtan, Gray, and Holzman, 2003; Carter, Berwald, and Loyns, 2005). This study contributes to the literature by using real options to value ex ante, firm-level management decisions, with random variables in a stochastic binomial specification.

Background

Developing and marketing GM traits can be costly and time-intensive. Discovery, proof of concept, early and advanced product development, and regulatory phases can take ten to fifteen years to complete, and revenue from successful development can only be realized after regulatory approval. Estimating development costs is difficult because these are ultimately firm-level activities and information is generally not published. Goodman (2004) estimated that developing a GM trait costs $60 million and that the regulatory approval process can cost $6-15 million (Kalaitzandonakes, Alston, and Bradford, 2006). …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Valuing New Random Genetically Modified (GM) Traits in Corn
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Author Advanced search

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.