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

International Journal of Food and Agricultural Economics, Vol. 6, No. 4, 2018, pp. 1-19 ISSN 2147-8988, E-ISSN: 2149-3766

Posted: 22 May 2018 Last revised: 19 Jan 2019

See all articles by Anca Balietti

Anca Balietti

Harvard University - Harvard Kennedy School (HKS)

Marc Chesney

University of Zurich - Department of Banking and Finance

Carlos Vargas

University of Zurich, Department of Banking and Finance, Students

Date Written: October 4, 2018

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.

Keywords: Quinoa; Smallholder; Real Options; Risk Assessment; Waru waru; Food security; Latin America

JEL Classification: D81, Q01, Q12, Q14, Q16, Q51, P45, O13

Suggested Citation

Balietti, Anca and Chesney, Marc and Vargas, Carlos, Long-Term Choices for Quinoa Farmers in Puno, Peru: A Real Options Case Study (October 4, 2018). International Journal of Food and Agricultural Economics, Vol. 6, No. 4, 2018, pp. 1-19 ISSN 2147-8988, E-ISSN: 2149-3766. Available at SSRN: https://ssrn.com/abstract=3175262 or http://dx.doi.org/10.2139/ssrn.3175262

Anca Balietti (Contact Author)

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States

Marc Chesney

University of Zurich - Department of Banking and Finance ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

HOME PAGE: http://https://www.bf.uzh.ch/en/persons/chesney-marc

Carlos Vargas

University of Zurich, Department of Banking and Finance, Students ( email )

Schönberggasse 1
Zurich
Switzerland

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