Miguel%20Henry

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Empirical Risk Analysisof Grape Production in
the Fallon Area, Nevada
Thesiss Defense

• Miguel Henry
• Department of Resource Economics
• University of Nevada, Reno
• December 2005

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• Determine which production alternative
• is stochastically more risk efficient
• Give to the decision makers the
• information required to make an informed
• decision

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Presentation Overview

• Introduction

• Motivations behind research
• Research objectives

• Data

• Model

• Empirical Results Implications

• Conclusions

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Motivations behind this research

• Environmental Climatic Reasons
• Political Multiple Use Reasons
• Economic Reasons

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Environmental Climatic Reasons

• Limited Water Supply
• - Extended droughts since 1987
• - Decrease in the Sierra snow pack

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Political Multiple Use Reasons

• Reduction in Irrigation Water for Fallon
• - Recovery Pyramid Lake level
• - Maintenance Truckee River flows
• Re-establish endemic fish species Protect
  water quality
• Protect recreation sport fishing
• - Protection Wetlands
• Recreation, fisheries wildlife
• (Recreation is a big business for Native
  Americans)

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Changes in Water Allocation

• - Reduction of
• irrigated acres
• Loss of farming
• Low profits
• - Land conversion
• to other uses

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Economic Reason

• Actual water use by alfalfa
• (Medicago sativa)

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• Alfalfa is a perennial legume

• It lives more than 2 years
• It is in production for 5 10 years

• It uses 3.5 4.5 acre feet of water/year

To produce 1 acre of alfalfa/year
Farmers use 1 - 1.5 million gallons of water
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In terms of irrigated acreage
Much of the land in Fallon is irrigated and
farmed as baled hay, using alfalfa

• 50,000 irrigated acres
• Risky climate and soils for other crops

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• Preserve agriculture
• Benefit community
• Protect Nevadas
• most valuable
• natural resource
• Water

Strategies

• Conversion of Water Rights
• More water efficient and
• profitable crops that consume
• less water/acre/season
• compared to alfalfa hay
• production

Example Wine Grapes (Vitis vinifera)
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Experiences in Nevada?

• Technically is feasible to grow
• quality wines in northwestern Nevada

• In terms of water savings

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Crop Conversion
What is the Percentage Saving in Water from
Alfalfa to Grapes?
90 93 The underlying topic is water!
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Experience in economic terms?

• To date there is no research that explains the
  economic feasibility of this industry in Nevada

• No studies have investigated the risk implicit
  in wine grape production

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(Continue)
Research Objective
Provide a better understanding of the economic
viability of alfalfa hay versus wine grape
production by using probabilistic stochastic
efficiency analyses
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Specific Objectives

• Characterize price and yield risks associated
  with alfalfa hay to those of Chardonnay and
  Merlot wine grapes grown in Fallon, NV
• Derive probability distributions of Present Net
  Returns Values
• Determine which crop is stochastically risk
  efficient

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(Input) Data

• Most important constraint
• Planning horizon of 10 years
• Historical data, average data, and
• maximum and minimum values
• Different sources (CA, WA, ID, NV)
• Experts and growers
• Data
• Prices (/ton)
• Yields (tons/acre)
• Variable and Fixed Costs (/acre)

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Model

• Stochastic Simulation Models

• Characterize the risk
• Derive the cumulative distribution
• functions of present net return values
• for each crop
• Derive risk efficient production practices

• Planning horizon of 10 years
• 500 iterations

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Stochastic Simulation Model
Stochastic Budgeting Model

• GRK distribution
• Minimum value
• Most likely value
• Maximum value

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Stochastic Simulation Model
Simulation Phase
Random variable on which decisions will depend
Stochastic Present Net Return Values
Cumulative Distribution Function
500 iterations
Probability ()
Present Net Return Value (/acre)
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Stochastic Results
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Outcomes -1,673 to 18,190 Alfalfa has the
largest minimum Chardonnay has the largest
maximum P5,000/acre 2.4 for Chardonnay 3.6
for Merlot Pgt10,000/acre 42 for
Chardonnay 0 for Merlot
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• Stochastic Results

• Deterministic Results

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Stochastic Efficiency with Bounds of Risk Aversion
Efficient Set!
ERA
NR
SRA
MRA
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Utility-Weighted Risk Premiums
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Conclusions

• Before suggesting alternative production
  methods, stochastic
• efficiency analyses should be employed
  whenever
• research is addressed for the development of
  new practices.
• Probability of producing positive present net
  return values
• with Chardonnay and Merlot is 100, with
  alfalfa hay 0.
• Growing wine grapes, especially Chardonnay, is
• stochastically the most risk efficient
  production alternative.
• Alfalfa hay is the least profitable and most
  risky alternative.
• Growing wine grapes represents an excellent
  agricultural
• crop production alternative in Fallon, Nevada.

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Conversion from alfalfa to vine grapes makes
cents!