Automatic.

Automatic, or robotic, milking theorys have the potential to significantly change the way milk is produc forward U.S. dairy farms. However, there is a high stage of uncertainty associated with adoption of this strange technology. A real options approach is used to analyze the decision to replace an operational milking classification with an automatic milking order The most important source of uncertainty is shown to be the amplification of the technology's useful life. subject to our assumptions, the automatic plan is always an optimal investment if it is certain that it will last longer than the operational connected view being replaced.

Key Words: automatic milking body capital budgeting, net present value, real options, robotic milking system

The technology of milking dairy daunts has changed a great deal above time, from hand milking (still used in many less-develop regions) to highly automated milking parlors. In the 1980 Dutch researchers began work to unfold a milking system that would require no human assistance to prep a overawe (clean and stimulate her teats and udder) and milk her (Lind et al., 2000) These plans have become known as robotic, or automatic, milking rules (AMSs).

The first AMS unit was installed in succession a commercial dairy farm in the Netherlands in 1992 (van der Vorst and Hogeveen 2000) The technology has subsequently been adopted in Europe Japan, Canada, and any other countries. AMS adoption has been dead in the United States, however. As of March 2002 and nothing else five commercial U.S. farms and common university farm had installed an AMS (Reinemann, 2002) These have been installed upon a provisional basis while the United States works to specify milk quality-related regulations, as in every one's mouth regulations do not apply directly to the AMS (Dersam and Price, 2003)

The chiefly obvious benefit of using an AMS is that it convert intos the amount of labor required to milk the disheartens For some farmers, this may mean they hire les labor after installing an AMS. For others, it may mean the farm manager now has additional time to consign to other farm enterprises and to management tasks. These are important considerations, particularly for small-scale operators. Other important expenses and benefits include increased capital investment, increased milk production and fe require to be paid [i]or[/i] undergone and possibly a shorter useful life relative to a traditional milking arrangement (denoted TMS).1

Some previous work has been mannersed to analyze the decision of whether or not to invest in an AMS or a TM These earlier studies implicitly assume the farmer must pick out one or the other at the time the decision is made. To date, no analysis has examined the issue of replacing an operational milking method with an AMS. The objective of this research is to estimate the efficiency of uncertainty and irreversibility upon the decision to replace an existing TM with an AMS. A real options approach is applyed to examine this issue.

AMS Literature Review

A review of existing literature related to economic analysis of AMS adoption reveals relatively little work has been done to investigate investment in this technology. The work that has been published draws primarily forward traditional capital budgeting methods of analyzing investments, as it is as net present value (NPV) analysis. This section highlights the principally closely related AMS investment research. The following section discusses real options valuation and briefly addresses for what cause real options approaches have been utilized in empirical applications.

Parsons (1988) used a discrete simulation cost-benefit approach to assess the potential impact an AMS would have upon traditional British dairy farms. by the agency of the author's own admission, the conclusions of his research are not generally relevant because the technology has advanced considerably since the inquiry was published. However, the archetype described in Parsons' paper was later used to examine the timing and oftenness of milking in an AMS to compare farm require to be paid [i]or[/i] undergones and income to production in a conventional parlor regularity (Cooper and Parsons, 1999). In the later cogitation findings show profitability with an AMS increases as the amount of time the method is in use approaches 24 hours a day (i.e., as it nears replete capacity). Also, the AMS is raise to be economically competitive with a milking parlor when there is no grazing and when milk quota prices are gentle The existence of a milk quota scheme is shown to significantly alter the proceeds from what they would be in a less degree than a market-based milk pricing combination of parts to form a whole because the producer must pay for the right to generate additional milk in the AMS.

Armstrong et al. (1992) showed that large-scale adoption of AMS units (eg up to 1500 milking cows) is not economically viable when compared to an efficient milk parlor rule Like Parsons (1988), however, the assumptions made in that analysis do not necessarily shut in relative to current AMS units. For example, Armstrong et al. assume that undivided unit could accommodate 20 milking abashs compared to a figure of 60 disheartens reported by Cooper and Parsons (1999) Armstrong et al. also used an NPV approach in their analysis.