AGRICULTURAL ECONOMICS Agricultural Economics 53 (2012) supplement 1–9 Production technology option value: the case of rbST in Michigan Nicole J. Olynk a, ∗ , Christopher A. Wolf b , Glynn T. Tonsor c a Department of Agricultural Economics, Purdue University, 403 West State Street, West Lafayette, IN 47907, USA b Department of Agricultural, Food, and Resource Economics, Michigan State University, 446 W. Circle Drive, East Lansing, MI 48824, USA c Department of Agricultural Economics, Kansas State University, 331-J Waters Hall, Manhattan, KS 66506, USA Received 6 October 2010; received in revised form 8 November 2011; accepted 4 May 2012 Abstract Agricultural producers are increasingly required to adjust production practices to satisfy retailer, and ultimately consumer, preferences. This article highlights the option value that underlies decisions related to production technologies using the case of Michigan dairy farmers and recombinant bovine somatotropin (rbST). Welfare impacts were calculated for dairy producers when milk production systems which allowed the use of rbST were eliminated from the producer choice set. Those dairy producers using rbST just before its elimination realized a higher welfare loss than those not using the technology. However, significant welfare impacts were found for all dairy producers indicating that all producers valued the option to use this production technology. JEL classifications: Q10, Q12, Q13, Q18 Keywords: Dairy farm management; Producer welfare; rbST, Technology; Willingness to pay 1. Introduction Consumers are increasingly interested in food production processes. Many recent changes in production practices used on U.S. farms can largely be attributed to market pressures rather than changes in regulation as the ability of consumer groups to influence firms increases (Hudson and Lusk, 2004). Agricultural producers are often obligated to alter production practices in order to continue to serve markets as retailers react to changes in consumer tastes and preferences (Cook-Mowery et al., 2008). One case in which market pressures recently led to wide- scale changes in a production process was recombinant bovine somatotropin (rbST) use in milk production. The rbST, also called recombinant bovine growth hormone (rbGH), was ap- proved by the Food and Drug Administration in November 1993 for commercial use to increase milk production in dairy cattle. First made commercially available in the United States in February 1994, the adoption of rbST has varied by farm size and depending on economic conditions (i.e., milk and feed prices). McBride et al. (2004) used a statistically representative U.S. survey to find that 17% of operations producing 32% of ∗ Corresponding author: Tel: 765-494-2567; fax: 765-494-9176. E-mail address: nolynk@purdue.edu (N. J. Olynk) the milk used rbST in 2000. Barham et al. (2004) examined the dynamics of rbST use over time in Wisconsin. Both McBride et al. (2004) and Barham et al. (2004) found that larger herds were more likely to use rbST. Although the technology has been available for use on U.S. farms for almost 20 years, controversy continues to this day over the use of rbST in milk production. Several major U.S. retail chains have moved towards procurement of milk sup- plies from cows not treated with rbST (Meijer, 2008; Roseboro, 2007; Reuters, 2008). Looking specifically at Michigan, a major retailer decision which necessitated change for dairy coopera- tives and producers was the Kroger Company’s announcement via press release on August 1, 2007 that it would transition to selling only rbST-free fluid milk by February 2008 (The Kroger Company, 2007). This decision led to a chain of events in the Michigan milk market as cooperatives and individual producers adjusted to meet changing demands. Although the use of rbST has not been legally prohibited in Michigan, decisions by key retailers in the state caused a rapid disadoption of the use of rbST in fluid milk production in Michigan in late 2007 and early 2008. To qualify for Fed- eral Milk Marketing Order pool price minima, cooperatives are required to provide a certain amount of fluid milk, which fluc- tuates widely—and to a large extent unpredictably—over time based on regional demand for fluid milk. Meeting these require- c  2012 International Association of Agricultural Economists DOI: 10.1111/j.1574-0862.2012.00615.x