Economics of On-farm Production of Indigenous Fruits - Indigenous Fruit Trees in the Tropics: Domestication, Utilization and Commercialization - page 241

characterized by irreversibility, uncertainty and flexibility. Irreversibility implies
that once trees are planted, initial investment costs are sunk; uncertainty takes
into account that future benefits may vary; and flexibility means that farmers
can choose the time when to plant trees. Other real option values include the
option to abandon, of sequential investment, to expand or contract, to
temporarily shut down, and to switch outputs or inputs. Overall, flexibility has a
value in itself (Trigeorgis, 1998).
Applications of the real options approach in agriculture have shown that
the value of the option to postpone the investment grows with enhanced
variability of input and output prices (Purvis et al. , 1995; Winter-Nelson and
Amegbeto, 1998). The value of the option to wait is also large if expected
improvements of the new technology are large, as Bessen (1999) demonstrated
for a new spinning technology for the cotton industry in England in the
beginning of the 20th century. This is particularly relevant for the case of IFTs
where research for productivity enhancement is ongoing.
For application of this approach to the problem at hand, a positive net
present value of investment is no longer sufficient for recommendation to invest
in tree planting. 2 The real options approach for investments recommends
investment if the present value of investment exceeds initial investment cost by
a factor greater than one. In new investment theory this factor is called the
hurdle rate. 3 The next best alternative to planting IFTs is to collect their
products from naturally grown trees in the communal areas. Thus, the
incremental benefit of planting over collection determines the decision to plant.
A major variable in investment analysis is the discount rate, which is
normally derived from the opportunity costs of capital for an investment with
similar risk. However, the discount rate should reflect the systematic risk
associated with the investment in trees, which may differ from the average risk
in the farmer's portfolio. Using the capital asset pricing model (CAPM), 4 the
discount rate can be derived from the existing portfolio and its covariance with
the investment at hand. 5 The result then is the risk-adjusted rate of return.
The hurdle rate increases with uncertainty and this may cause farmers to
postpone the investment until they have better information on the future
development of improved species and their marketing potential. Also, expected
improvements of IFT via the domestication programme increases the value of
waiting to invest, and therefore the hurdle rate.
In the next part of the chapter, we describe the current status of indigenous
fruit tree planting in Zimbabwe, the costs and benefits related to the investment
decision and, using the real options approach, demonstrate the thresholds for
investment. 6
13.4 Study Area, Data Collection and Analyses
13.4.1 Study area and data collection
Data were collected in two surveys. First, an in-depth monitoring of 19
households of Ward 16, Murehwa district and 20 households of Takawira