Date of this Version
Agricultural businesses deal with uncertainty of all kinds. Uncertainty arising from variability in resources, markets, human factors, and regulatory policy can be sources 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. The goal of the first chapter is to present a compilation of literature discussing flexibility in general in an attempt to define, measure, and value flexibility in isolation. In the second chapter, flexibility in agricultural systems will be explored as a risk management strategy and, through a series of applied examples, described both in isolation and together with other risk management strategies. The emphasis will be placed on agricultural scenarios, but non-agricultural cases will be visited as well. In the third chapter, the theory of flexibility will be illustrated in depth through a natural resource management example. Building on the framework of real options, different approaches for cross fencing a pasture for grazing will be used to identify the value of flexibility to alter land use.
Advisor: Jay Parsons