The Economics of Perennial Orchards with Endogenous Age Classes

• Agricultural Economics Workshop

Date and Location

Thursday, February 15, 2018, 4:10 PM - 5:30 PM
ARE Conference Room, 2102 Social Sciences and Humanities

Abstract

Perennial crops exhibit boom and bust cycles. It has been conjectured that better price forecasts could reduce or eliminate production cycles in perennial crops, but an alternative hypothesis is that production cycles are optimal for a profit maximizing grower even under perfect information. We build a dynamic Lagrangian model of an orchard, and show in two- and three-age-class infinite horizon models that cycles are generally optimal, unless the grower starts from a balanced orchard (i.e. even share of land allocated to each age-class). Our results suggest that completely eliminating production cycles is suboptimal for orchard growers, and therefore better price forecasts should not be expected to eliminate production cycles. In addition, previous analyses of optimal orchard management assumed that yields were monotonically increasing over the life of the tree. In our the three-age-class model we are able to identify optimal stationary trajectories for age-yield relationships where yield declines at the end of the tree's life.