Valuing GM technologies using real options: the case of drought tolerant wheat in Australia

Wynn, Katherine; Spangenberg, Germán; Smith, K. F.; Wilson, William W.

doi:10.1080/09537325.2018.1474194

Cited by 8 publications

(7 citation statements)

References 17 publications

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“…The empirical model in this study uses the real option framework to provide the market valuation of research and development (R&D) projects. The model builds on previous studies that utilized real options to value R&D investments (Morris, Teisberg, and Kolbe 1991; Luehrman 1998; Brach and Paxson 2001; Jensen and Warren 2001; Seppä and Laamanen 2001) and on the use of real options to value the crops' GM traits (Furtan, Gray, and Holzman 2003; Carter, Berwald, and Lyons 2005; Flagg 2008; Shakya, Wilson, and Dahl 2013; Wilson, Shakya, and Dahl 2015; Wynn et al 2017; Wynn et al 2018; Wynn et al 2020).…”

Section: Background and Previous Studiesmentioning

confidence: 99%

“…Therefore, the values could be derived using the closed‐form, Black‐Scholes option pricing model that is commonly utilized in financial markets. Later approaches used to value GM traits in crop development (Shakya, Wilson, and Dahl 2013; Wilson, Shakya, and Dahl 2015; Wynn et al 2017; Wynn et al 2018; Wynn et al 2020) differ from this earlier approach because the real option valuation is applied throughout the R&D and commercialization phases of development (i.e., an American‐style option) by utilizing a binomial lattice to derive the option value.…”

Section: Background and Previous Studiesmentioning

confidence: 99%

“…The analytical model assumes that the commercialization phase lasts a fixed period of fifteen years, which is based upon our discussions with industry participants. Formulating the cash flows for the commercialization phase is based on a market penetration model that is commonly used in the pharmaceutical industry (Bogdan and Villiger 2010) and in earlier studies about GM crops (Shakya, Wilson, and Dahl 2013; Wilson, Shakya, and Dahl 2015; Wynn et al 2017; Wynn et al 2018). The maximum market area (in million acres) is a parameter in the model and is fixed for the entire fifteen‐year period.…”

Section: Analytical Modelmentioning

confidence: 99%

See 2 more Smart Citations

Gene Editing Versus Genetic Modification in the Research and Development of New Crop Traits: An Economic Comparison

Bullock¹,

Wilson²,

Neadeau³

2021

American J Agri Economics

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Gene editing is a relatively new plant‐breeding tool that, unlike earlier methods such as genetic modification, is more precise in targeting its manipulations to site‐specific locations within the genome. This precision with gene editing offers considerable research and development cost economies and a higher probability of success, particularly for the initial discovery phase of research and development. This study quantifies the advantages of gene editing versus genetic modification by examining the minimum required planted area for a proposed trait where a typical crop technology company can expect to break even on its research and development investment using a real option valuation model. A novel feature of the model is the combination of a decision tree with a binomial lattice for project valuation with an embedded abandonment real option. A primary numerical result from the model was the observation that gene editing required a much smaller potential market area (96% smaller) to break even on the financial investment when compared to genetic modification for the same trait value per acre. This result held across a wide range of potential trait values. Sensitivity analysis on the results indicated that the much higher probability of success for gene editing in the discovery phase of research and development was the primary driver of the difference in break‐even acreage.

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Section: Background and Previous Studiesmentioning

confidence: 99%

Section: Background and Previous Studiesmentioning

confidence: 99%

Section: Analytical Modelmentioning

confidence: 99%

See 1 more Smart Citation

Gene Editing Versus Genetic Modification in the Research and Development of New Crop Traits: An Economic Comparison

Bullock¹,

Wilson²,

Neadeau³

2021

American J Agri Economics

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“…This includes the wait option, also called "deferral option," to improve an urban drainage system under climate change (Park et al, 2014), the deferral option to invest in a canal to reduce flood risk (Abadie, Sainz de Murieta, & Galarraga, 2017), and deferral and abandon flood mitigation options under climate change uncertainty (Ryu et al, 2018) as well as compound options in the upgrading of a hydropower plant (Kim, Park, Bang, & Kim, 2017). Another application explores investment in research and development for a drought tolerant crop (Wynn, Spangenberg, Smith, & Wilson, 2018).…”

Section: Traditional Risk-based Roamentioning

confidence: 99%

The added value of real options analysis for climate change adaptation

Wreford

Dittrich

Pol

2020

WIREs Climate Change

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Climate change adaptation investment decisions can be made more efficiently if uncertainty and new information are considered in their economic appraisal. Real options analysis (ROA) is a robust decision‐making tool that allows for the incorporation of both uncertainty and new information. In this opinion article, we argue that ROA is a valuable tool, providing the analysis is designed to reflect the real‐world characteristics of the decision context. We highlight the differences between traditional risk‐based ROA, and scenario‐based ROA, and discuss the relative merits of the approaches from the perspective of their assumptions and use of climate information. We also emphasize the need for increased co‐development of ROA design and applications with end‐users. Given the large climate uncertainties for long‐term adaptation planning, we suggest that an emerging strand of scenario‐based ROA methods offers ways to help identify and conditionally value flexibility without aggregating values into precise expected values across states of the world. This article is categorized under: Climate Economics > Iterative Risk‐Management Policy Portfolios

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“…Using the values for p, u , and d , the values for each node are calculated until the entire binomial tree is complete. Binomial trees are one of several tools that can be used to solve real‐option problems (as discussed in Cox et al, 1979; Kodukula & Chandra, 2006), have been used previously (e.g., in valuing technology; Shakya et al, 2013; Wilson et al, 2015; Wynn et al,2017, 2018, 2020), and have been used for shipping markets (Alizadeh & Nomikos, 2009).…”

Section: Empirical Specificationmentioning

confidence: 99%

Commodity procurement as contingent claims: Capturing risk and real options in flour milling

Wilson

Klebe

2020

Agribusiness

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Procurement, inventory, and stockholding strategies are important functions for agricultural commodity processing and trading. This paper's purpose is to develop an optimal inventory strategy for wheat in flour milling by considering the risks in margins and demand. We develop a model that views buffer stocks as real options for future sales. The model was applied to a representative wheat flour mill in the Upper Midwest and used prices for inputs, outputs, margins, and associated distributions and correlations. The base case results indicated that the optimal buffer stocks should be 20% more than expected demand in the base case, and vary in a logical way with changes in demand, market carry, and stockout penalties. Implications from these results illustrate that stockholding is an important element of agricultural processing. This approach indicates that managers should strategically manage inventory positions and purchases that result in buffer stocks. [EconLit citations: C6, L1, L7, L9, Q12, Q14]

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Valuing GM technologies using real options: the case of drought tolerant wheat in Australia

Cited by 8 publications

References 17 publications

Gene Editing Versus Genetic Modification in the Research and Development of New Crop Traits: An Economic Comparison

Gene Editing Versus Genetic Modification in the Research and Development of New Crop Traits: An Economic Comparison

The added value of real options analysis for climate change adaptation

Commodity procurement as contingent claims: Capturing risk and real options in flour milling

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