Determining the Extent of Economical Sustainability of a Case Study Milk Farm in Bosnia and Herzegovina Based on the Real Options Model

Abstract

The aim of this research was to determine a sustainable economic model of a milk farm in Bosnia and Herzegovina through the possibility of reorientation of raw milk production into cheese on-farm processing. All investment costs, annual production costs, production quantities, prices and annual income were collected through an unstructured questionnaire. The case study farm, originally engaged in milk production, reoriented itself to processing milk into several products. A cost–benefit analysis was applied for the 14-year project lifetime, as well as the Black–Scholes and binomial models of real options evaluation for shifting to cheese production in the fourth year of the project. The milk production farm is economically inefficient, and the investment project is unacceptable, resulting in negative net present value under assumed typical production parameters, and the payback period is longer than the project lifetime. The cheese production option value is positive according to the Black–Scholes and binominal models. Both real options models confirmed that processing milk into cheese is sustainable long-term and economically.