Economic Evaluation of Switching Rice Paddy to Upland Field with Crop Selection Flexibility

Abstract

This study evaluated economic feasibility of switching rice paddy to upland field with crop selection flexibility. For the analysis, real options approach with switching option was adopted, in which farmers were assumed to have a right to switch rice paddy to upland field and make crop mix under uncertainty. Stochastic variables were total revenues of main crops in Chungcheong provinces, such as rice, soybean, spring potato, barley and sesame. The variables were empirically proven to follow Mean Reverting Process, which applied to Trinomial Option Pricing Model. The results showed that switching rice paddy to upland filed was economically feasible only with spring potato as a first crop while soybean was additionally feasible when considering second crop with barley under crop selection flexibility in upland field. However, the size of economic feasibility varied according to conversion cost from rice paddy to upland field and vice versa. The implication of this study was that crop selection flexibility under uncertainty provided more sensible decision for cropping system and conversion from rice paddy to upland field. In addition, the conversion cost from rice paddy to upland affected farmers’ decision to move to upland field, which could be a choice variable to policy makers.