CLIMATE CHANGE AND COFFEE FARM RELOCATION IN ETHIOPIA: A REAL-OPTIONS APPROACH

Abstract

Climate change and emerging pests and diseases may negatively affect coffee yields and revenues in Ethiopian regions at low altitudes. Hence, the relocation of coffee farms to regions at higher altitudes has been suggested in order to assure sustainability and resilience for Ethiopian coffee production. In this paper, we study how sunk establishment costs, uncertain net returns and policy-induced incentives may affect the timing and value of a coffee farm relocation. This is done by developing a real-options model taking into account the relevant drivers of the farmer’s decision to relocate. We then present an empirical analysis examining a hypothetical relocation. We show that relocation is a rather attractive opportunity even though the presence of volatile net returns and relatively high establishment costs may induce its postponement. Thus, we determine the optimal amount of subsidy needed in order to foster the relocation process.