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Analyzing Flexibility as a Risk Management Tool in Agricultural Systems

Jedidiah Hewlett and Jay Parsons

Summary

Agricultural businesses deal with uncertainty of all kinds. Uncertainty arising from variability in resources, markets, human factors, and regulatory policy can be a source of significant risks. Acquiring or building flexibility in an operation is one of the ways suggested to manage risk and uncertainty—reducing the impact of negative outcomes and increasing the benefit of positive outcomes. Although flexibility has been repeatedly encouraged for businesses, the definition of flexibility and its value remains ambiguous after more than 80 years of research. Flexibility is often described as a multi-dimensional ability to effectively deal with change in the business operating environment. Flexibility can also be described as an ability to switch to alternative means that allow the same objectives to be reached. Thus, maintaining flexibility requires active and ongoing management to retain its effectiveness for mitigating risk. Building on the framework of real options, the goal of this presentation is to expand the work analyzing flexibility to date in an effort to define, measure, and value flexibility in an agricultural business setting. An attempt will be made to describe flexibility in isolation and at work together with other risk management strategies through a series of applied examples. The emphasis will be placed on agricultural scenarios, but non-agricultural cases will be visited as well. Last, the theory of flexibility will be illustrated in depth through a natural resource management example. Different approaches for cross-fencing a pasture and the flexibility to alter land use will serve as the basis for this discussion.

Details

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