Long-Term Investment Choices for Quinoa Farmers in Puno, Peru: A Real Options Case Study

Abstract

The goal of this article is to assess the optimal choices of a smallholder quinoa farmer in the Puno region of Peru, in terms of his decision if and when to undertake certain investments that are expected to increase quinoa yield and crop resistance to harsh weather conditions, such as frost. We focus on two irreversible options, namely quinoa variety management and Waru Waru. The former alternative considers the option of the farmer to switch from his business-as-usual quinoa variety to one that has different yield and frost resistance characteristics. The latter alternative refers to the implementation of an ancestral cultivation practice that is estimated to offer benefits in terms of yield increase and resistance to harsh climate conditions. We rely on Real Options Analysis to assess the two types of investment opportunities for the farmer. This approach allows us to determine not only whether the investments should be undertaken or not, but also the optimal timing to do so. We find that one quinoa variety (Kancolla) offers the highest benefits to the farmer and switching to this option should be immediate if investment costs are low; however, as costs increase, the decision to switch quinoa variety is optimally postponed until quinoa price uncertainty is reduced. We find that the Waru Waru option is not worth undertaking unless further evidence related to the increase in the productivity of quinoa is developed. However, at increases in productivity above 20%, the Waru Waru option becomes highly attractive. The article also discusses how quinoa price dynamics, yield sensitivity to frost, and governmental support impact decisions of the smallholder farmer.